Short-term clouds but limited recession risk
Macro risks proliferate and global manufacturing has experienced a sharp slowdown in output, order books and capital expenditure plans. However, consumer spending on goods and services remains resilient and the mix of monetary and fiscal policies has turned more supportive.
The economists at the Organisation for Economic Cooperation and Development (OECD) recently updated their assessment of the global economic outlook. They highlight the trade war and Brexit as key risks, to which we should add the heightened tensions in the Persian Gulf after the recent attacks on Saudi Arabia’s oil facilities. Their forecast for global GDP growth for 2019 was cut to 2.9%, the lowest level in a decade.
Trade war tensions ratcheted higher this summer with President Trump’s unexpected announcement of punishing tariffs on all imports from China. Talks were halted and are only just about to resume. However, as concerns about the impact of the tariffs on both growth and inflation have proliferated, so have signs of a more conciliatory approach. This suggests that neither party feels it can afford the recessionary impact of a long-running trade war: the social contract between the government and the Chinese people hinges on economic prosperity and the US president has an election to fight in just over a year.
For China, the trade-war effect was noticeable in August’s industrial production data – at +4.4% year-on-year, output growth was at its lowest level since February 2002. And in the US, the Institute of Supply Management’s survey of manufacturing confidence dipped into contraction territory for the first time since the late-2015 slowdown, a cause of much market angst. Ironically, such data points appear to have concentrated policymakers on agreement.
In the UK, tensions have also run high in recent weeks – the October 31 Brexit deadline looms. The OECD (Organisation for Economic Co-operation and Development) has warned that “no-deal” Brexit would hit exports hard and push the economy into recession. However, before suspension, Parliament did pass a law designed to prevent this and requiring Prime Minister Johnson to seek another delay if withdrawal is not approved by mid-October. Sterling surged on the news.
While the situation remains extremely fluid, Mr Johnson has been forced to abandon much of his hardline negotiating stance and appears to be seeking solutions which might solve the thorny issue of Ireland’s border with Northern Ireland, enabling him to deliver Brexit as promised. In addition, his Brexit Secretary has suggested that the standstill period before separation might be extended by two years to 2022, a welcome breathing space which would help smooth transition.
Insufficient time has elapsed since the September 14 attacks on Saudi Arabia to have a clear idea of their long-term implications. For now, indications are that one-half of lost Saudi output has already been restored and that end-August levels could be achieved by early October.
Over the past few months, the global oil market has been in oversupply with US output continuing to reach new all-time highs. This has kept prices low and helped rebuild plentiful commercial stocks.
Oil prices have thus retreated from the immediate post-attack spike and remain well below year-ago levels. Nonetheless, these attacks are likely to add an additional risk premium to oil prices for the long term.
We expect these risks to continue to slow economic growth in coming months. However, strong job markets, wage growth and consumer confidence should combine to mitigate recession risks for next year.
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