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SINGAPORE (Aug 28): Although near-term activity indicators remain stable, global growth appears to be losing momentum in 2018, compared to 2017 when major regions were accelerating.
Currently, Asia and Europe appear to be slowing, diverging from the US, which is still experiencing strong growth.
In a Schroders TalkingPoint report, chief economist and strategist Keith Wade sees three main factors as contributing to what seems to be a summer hiatus and whether these are likely to have a permanent or temporary effect.
1. Cooling China
Indicators have implied that the Chinese economy could be slowing faster than the latest GDP figure suggests. GDP in 2Q was only 0.1 percentage point (ppt) lower than 1Q, but recent data such as monthly retail sales, investment and exports indicate that 3Q may see a greater slowdown in activity.
Subsequently, given China’s role in the Asian and global growth, the rest of the world will likely have implications.
2. Weaker commodities
Signs of weaker industrial production have been flashing, on the back of a decrease in industrial metals prices, which have dropped about 14% since end-June. According to Wade, this is a reasonably reliable indicator of activity, as prices reflect the level of industrial production. Industrial production is a key component of economic growth so less production will weigh on overall growth.
Moreover, current metals prices suggest that G7 production will stall in the coming months, with consequences for global growth.
3. Stronger USD
Another important constituent of global growth is trade growth and this will highly depend on the affordability of USD. Hence, with the USD strengthening, countries transacting trade in USD will be hurt and see a slowdown with knock-on effects for global growth.
In addition, several other countries tend to borrow in USD and the stronger USD will mean that borrowing becomes more expensive, which will further weigh on growth.
Any lasting effect?
“We see it more likely that these effects are temporary rather than permanent. In our view, what we’re seeing at the moment is a summer lull rather than anything more sustained,” says Wade.
The weakness in metal prices may be related to the steel tariffs, as evidence has shown that firms have rushed to stock up before the tariffs came into effect on June 1 and are now trimming back.
Underlying demand also remains intact, as underlying orders in the world economy are still robust, employment is strong and confidence high.
Trade tensions not good for business
“The risk to this outlook is that trade tensions cause business confidence to falter and companies cut back on their capital spending,” says Wade.
The global economic upswing has always been synonymous with strong capital spending. If businesses take fright at political developments, they could end up cutting their spending in the face of uncertainty, thus having consequences for global growth.
Although talks that the US and EU have reached a deal is positive, tensions with China continue to remain high.
“In our view, the fact that President Trump has put together a US$12 billion ($16.4 billion) package to support farmers affected by recently-introduced tariffs, suggests the president is preparing for a drawn-out battle with China. It looks like the US-China trade war is still heating up,” adds Wade.