Forget tariffs, new report offers optimism on global economy

Despite the renewed threat of tariffs and possible trade war, the global economy is over the worst, suggests a new report and that is probably good news for the markets.

Article updated: 7 May 2019 10:00am Author: Michael Baxter

As these words are written, doom and gloom is in the air. President Trump has been tweeting, the US accuses China of backpedaling in trade talks and stock markets appear to be tumbling.

Maybe, though, things are not as bad as many had expected. Now a new report suggests that things are set to get better.

Before I get into this report, let’s consider some evidence. The Eurozone grew at 0.4 per cent in the first quarter of this year, compared to the last quarter of 2018, suggests recent data from Eurostat. This is not a brisk rate of expansion, but much better than most economists were forecasting a few months ago. It also marks a big improvement on the end of last year, when the region grew at 0.2 per cent.

The data did not break down the numbers by country, but data published elsewhere showed that Spain expanded at 0.7 per cent, (faster than in the previous quarter) France and Austria by 0.3 per cent, (same as previous quarter) but Belgium slowed to 0.2 per cent. Based on this, Capital Economics calculated that both Germany and Italy saw an improved quarter after a recent contraction. This estimated rise in the German and Italian GDP is a big deal, with many arch Brexit supporters recently arguing that Germany was on the brink of deep recession and inferred from this the expectation that the EU had moved closer to breaking up.

The latest purchasing managers index, tracking April, for the Eurozone, did point to a slowdown, however. IHS Markit which compiles the data said that the numbers suggest growth of around 0.2 per cent. But, drill down into the purchasing managers indexes and you find that Germany, France and Italy saw an improvement in April — rather contradicting predictions that Germany was on the brink of a deep recession.

The latest ISM purchasing managers index (PMI) tracking US manufacturing fell to a 2 1/2 year low in April. Then again, while the latest PMI tracking US non services was down, with a reading of 55.5, it is still pretty darn good. The US economy is slowing, hardly surprising given the effect of tax cuts will be mostly out of the system by now. But the
US economy appears to be a long way from economic crisis — even though, in my opinion, it is in ideological crisis.

The PMI tracking the UK, by contrast, paints a sorry picture. The index tracking UK services did improve, but up only modestly from the disastrous reading of 48.9 (32-month low, and consistent with severe contraction) to 50.4. Chris Williamson, Chief Business Economist at IHS Markit, which compiles the survey said: “The economy remained more or less stalled at the start of the second quarter.”

The more encouraging news comes from India and China in the shape of a new report from the National Institute of Economics and Social Research.

The report suggests that stimulus policies put in place in “China and other countries will more than offset the trade shock imposed by the US.”

“We argue” said the report’s authors Amit Kara and Iana Liadze “that the global economy will recover from what we believe was a soft patch in the second half of last year. The most recent economic data from the Euro Area, US and China suggests that the global economy is in fact staging a recovery in the first quarter of this year. It is also our view that policy actions contributed to the slowdown last year and that the recovery that is built into our forecasts this year is also driven by policy.”

The tariffs slapped on China by the US, and any possible retaliatory response, “suggest that the peak impact on world GDP will be in the region of 0.1-0.2 per cent compared to a baseline scenario without the tariffs. The Chinese economy is most vulnerable with GDP impact of somewhere between 0.3-0.6 per cent and the impact on US GDP is likely to be around 0.1-0.3 per cent,” says the report.

As a result of the slowing economy they say that: “Within the emerging world, the People’s Bank of China (PBOC) lowered the required reserve ratio in steps and the Reserve Bank of India injected stimulus into the economy.”

In addition: “China’s government announced a set of stimulus measures (worth around 2 trillion yuan or 2.2 per cent of GDP) in March this year covering taxes (reduction in VAT and personal taxes) and employers’ social security contributions.”

“Our simulation results suggest that the positive impact of the fiscal expansion on Chinese GDP will broadly offset the negative impact on Chinese output from the trade shock. Both policy actions will however, drive prices higher.”

In short, despite the tariffs recently imposed on China, and even if more follow, thanks to fiscal and monetary stimulus, Chinese growth is expected to improve.

On the other hand, if the latest words coming out of the US prove to be bluffs, then China will perform better still.

Of course, long-run, trade wars can be extremely dangerous, and the stimulus measures in China do mean an even bigger build-up in Chinese debt.

But at least we have some reasons to be bullish, when all around there is gloom. Such times may represent buying opportunities.


These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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