Assessing the outlook for global growth
* Economists went into 2019 forecasting a slowdown in global growth. That slowdown has come faster than expected. Alarmed by the speed of the downturn, the US Federal Reserve and European Central Bank have switched from tightening monetary policy to easing.
* The combination of slower growth and easier policy have elicited very different responses from business and financial markets.
* Business confidence has fallen from last year’s peaks across most of the West. Companies have become more cautious.
* Faced with the prospect of still-lower interest rates, equities have soared, hitting new highs in the US. The calculation for markets is that with inflationary pressures subdued there is nothing to prevent central banks from boosting growth with more cheap money.
* The global economy faces a number of headwinds. An outbreak of protectionism has slowed trade volumes over the last year and triggered a downturn in manufacturing. Trend growth in China’s economy is slowing as its workforce contracts and a long investment boom draws to a close. High levels of debt, in areas such as cov-lite corporate lending, the Chinese financial sector and Italian banks, create vulnerabilities that could be exposed as growth slows. Geopolitical risks loom large: between the US and China, in the Middle East and over Brexit.
* This is also, by historic standards, a mature recovery. America’s recovery has reached its tenth birthday, eclipsing the previous record holder, the 1991-2001 recovery, and entering the history books as the longest US recovery since records started in 1854.
* The current edition of the Economist argues that the US is probably more recession-proof than in the past. The article points out that the usual harbingers of US recessions, chronically overvalued housing and rising inflation, are absent. Manufacturing’s reduced role in the US economy, coupled with better management of inventories and supply chains, should, the Economist argues, reduce the volatility of the economic cycle.
* This is undoubtedly good news. But while some vulnerabilities have reduced over time, others have increased.
* Free trade, one of the most powerful boosters of post-war prosperity, is under greater pressure today than for many decades. The sort of cooperation between Europe and the US which helped prevent the financial crisis turning into a depression is weaker than it was ten years ago. The resignation of Britain’s ambassador to Washington last week suggests that, even between close allies, relations are not quite what they were. There is less consensus between and within countries on economic and social policy. That increases uncertainty and the risk of disruptive change. It is true that US housing is not especially pricey by long term yardsticks – but valuations elsewhere, from equities to cov-lite debt, look stretched. One of the lessons of 2008-09 is that financial crises often spring from unexpected places – not the place they came from the last time.
* So can easier monetary policy offset all these risks?
* The short answer is no. Easier policy would reduce, but not eliminate, the risk of a hard landing for the global economy. Looser policy anyway comes too late to prevent a slowdown in global growth this year.
* Now this still looks far more like a slowdown than something worse. Low inflation, easy monetary policy and low unemployment are material positives. With luck the next couple of years should see more moderate, but continued growth across the major economies. Yet the risks are skewed towards things being softer rather than stronger than this.
* Last week a survey of global fund managers by Absolute Strategy Research found that on average respondents see a 45% probability of a global recession occurring in the next 12 months. This seems a bit high to me – but it testifies to the nervousness out there.
OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week down 0.6% at 7,506.
Economics and business
* The UK economy grew by 0.3% in May having contracted in April, leading indicators suggest a possible Q2 contraction however
* Euro area industrial production grew more strongly than expected in May following two months of contraction
* The US has launched an investigation into whether a new French tax of 3% on the revenues of large digital businesses, similar to one planned by the UK, is an unfair trade practice. The tax has drawn sharp criticism from President Trump
* The US announced anti-subsidy duties on imports of Mexican and Chinese steel, claiming they were unfairly subsidised
* The FT reported that Mr Trump has agreed to tone down criticism of Chinese policy regarding Hong Kong to smooth trade talks with China
* Deutsche Bank is cutting 18,000 roles as it restructures its business
* Turkish president Recep Tayyip Erdogan sacked the governor of the Turkish central bank for resisting calls by the president to cut rates
* Remarks by US Federal Reserve chair Jay Powell heightened expectations of a rate cut this month
* Buoyed by expectations of easier monetary policy, the S&P 500 hit a new all-time high
* A UK tanker sailing through the Strait of Hormuz was “impeded” by Iranian vessels. A Royal Navy frigate escorted the tanker through the strait
* Iran has breached limits on uranium enrichment as it seeks to pressure European countries to uphold the nuclear deal agreed in 2015
* Reckitt Benckiser agreed a $1.4 billion settlement in relation to sales of a drug linked to the opioid crisis
* Lincolnshire Police is seeking a judicial review over the decision to require all new police officers to be educated to degree level, citing increased costs and the impact on numbers of front line staff
* A UK parliamentary committee has called on regulators to do more to prevent consumer exploitation by utilities and financial services companies
* US President Donald Trump criticised the planned digital currency Libra, indicating it would be subject to the same regulation as banks
* Airbus is on course to become the world’s largest plane manufacturer as Boeing orders fall due to its recent safety issues
* The US government has announced it will allow American companies to sell products to Huawei if the sales do not compromise national security
* The UK Information Commissioner’s Office has issued fines of £183 million and £99 million, the first under GDPR, to British Airways and the Marriott hotel group following data breaches
* The US Federal Trade Commission approved a $5 billion dollar settlement with Facebook over privacy breaches
Brexit and European politics
* The Bank of England said that the “perceived likelihood” of a no-deal Brexit has increased, which would bring “material risks of economic disruption”
* Labour Party leader Jeremy Corbyn said he would “make a case” to Parliament in September to have another Brexit referendum but failed to explain whether Labour would support Leave or Remain in a snap general election
* Sir Kim Darroch resigned as British ambassador to the US after leaked emails critical of President Trump sparked a strong response from the US President
* Car maker BMW has shifted some of its production operations from the UK to Germany to ensure it complies with EU regulations after Brexit
* The number of asset management businesses domiciled in France has declined over recent years, despite the country hoping the UK’s vote to leave the EU would lead to an influx of funds
* Gertjan Vlieghe, a member of the Bank of England’s Monetary Policy Committee, said a no-deal Brexit could mean interest rates are cut to near zero
* Buzzfeed News reported that the far-right Italian Lega party led by deputy prime minister Matteo Salvini covertly sought funding from Russian businessmen for their election campaign in breach of Italian electoral law
* The president of the Eurogroup advised Greece’s new government – which favours fiscal easing – to stick to the terms of its bailout programme
And finally… Japanese car-sharing service Orix was perplexed to discover that people were renting its cars but not driving them. On further investigation it found that its cars were being rented to have somewhere to sit and eat lunch, to store personal belongings, to charge mobile phone and even as a place to take a nap – asleep at the wheel