Global warnings
* The global economy has been slowing for some time. The question is whether we are heading for a soft landing or something worse.
* Financial markets last week raised the odds on “something worse”. Investors sold riskier assets, including equities, for safe havens such as gold and government bonds. Markets were reacting to alarm signals from two of the world’s most important economic indicators.
* First, the yield curve, a gauge of future growth prospects, inverted last week in the US and in the UK. The yield curve measures the gap between the interest rate, or yield, on ten-year government bonds and shorter-maturity debt. Central banks largely set short interest rates while long-term yields are driven by market expectations for growth and inflation. When ten-year rates fall below three-month rates, as they have done in the US and the UK, the curve inverts signalling that short rates are too high and growth prospects are weakening. The fact that each of the last seven US recessions were preceded by an inverted curve explains why the equity market took fright last week to the inversion of the yield curve.
* The second worry relates to the devaluation of the Chinese renminbi. What started last year as a trade conflict between the US and China over exports of metals has widened, taking in consumer goods and technology. Earlier this month a new front in that conflict opened with the renminbi falling through the symbolic threshold of seven yuan to the dollar for the first time since the financial crisis. The US interpreted the fall as an attempt by the Chinese authorities to gain unfair export advantage, prompting the US Treasury to name China as a currency manipulator. Markets worry that the trade war could be morphing into a currency war. That conjures up the spectre of the competitive devaluations which accompanied, and reinforced, the Great Depression of the 1930s.
* A run of weak economic data have added to market anxieties. GDP growth in Germany and the UK unexpectedly contracted in the second quarter of the year, prompting talk of recession. Chinese industrial activity has slowed markedly, to the lowest level in 17 years. Growth in global export volumes has almost ground to a halt. The risks of recession are creeping up.
* The New York Federal Reserve’s model, based on the slope of the yield curve in July, put the risk of a US recession in the next 12 months at 32%, the highest level since the financial crisis. This may understate the dangers. The US curve has become more inverted in recent weeks so the current recession probability is probably higher. And given that the average gap between yield curve inversion and the onset of a US recession is 18 months the real risks are likely to lie in late 2020 and 2021, not over the next 12 months.
* Central banks are alive to the risks. Markets assume that the Federal Reserve and the European Central Bank will ease monetary policy over the coming months to try to bolster growth.
* There’s more talk too of governments increasing spending to support growth. Borrowing costs for governments are at ultra-low levels and a quarter of all government bonds offering a negative yield. We are in a remarkable situation where investors will pay many governments, including Germany’s, to lend them money. Low productivity and inadequate public infrastructure add to the case for debt-financed public investment. Further economic weakness would add to the pressure for governments to ease fiscal policy.
* It’s not all bad news. The absence of many of the usual harbingers of recession – weakening labour markets, tighter credit conditions and financial stress – means that most forecasters think the West will avoid recession. The general view among forecasters is that growth will continue at more subdued rates.
* Much will depend on the actions of central banks and governments. In the euro crisis the president of the European Central Bank, Mario Draghi, vowed to “do whatever it takes” to arrest the downturn. This reassured markets and the ECB’s subsequent actions saved the day, preserving the euro area and boosting growth. Today it’s not so much a question of whether central banks have the necessary will – and more a question of whether, with interest rates at such very low levels, monetary policy still has the power to reboot growth.
OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week down 1.9% at 7,117 as investors grew increasingly concerned about the health of the global economy.
Economics and business
* The German economy contracted by 0.1% in the second quarter, due in part to a decline in exports as global trade tensions weighed on the manufacturing sector
* The closely watched ZEW index, a gauge of economic sentiment in Germany, hit its lowest level since 2011 in August
* Comments by Olli Rehn, a member of the ECB’s rate-setting committee, suggest the ECB is planning significant stimulus in September
* The US and UK yield curves inverted, suggesting investors expect easier monetary policy in the future. Yield curve inversions often occur before recessions
* US 30-year bonds yields fell below 2% for the first time as investors sought out safe assets due to concerns over the economic outlook
* US retail sales beat expectations, growing 0.7% in July as UK retail sales also showed a modest expansion
* UK wages grew at their fastest rate since 2008, growing at an annual rate of 3.9% in the three months to June, indicating the labour market remains robust despite the slowing economy
* US President Donald Trump announced a delay on some tariffs on Chinese goods until December to reduce the “impact on US customers” over the holiday period
* The Argentine peso fell dramatically as a primary poll suggested weak support for president Mauricio Macri and strong support for challenger and populist candidate Alberto Fernandez; investors are concerned over the impact of Mr Fernandez’s economic policies should he win the October election
* Large-scale anti-government protests continued in Hong Kong, disrupting flights from the airport; the FT reports that a paramilitary force has assembled on the border stoking fears Beijing will intervene in the crisis
* South Korea revoked Japan’s status as a preferential trading partner following a similar move by Japan. The long-running dispute stems from a disagreement over World War II reparations
* Gibraltar released a detained Iranian tanker despite US opposition. It is hoped the release will facilitate the release of a UK-flagged tanker seized by Iran
* Financial investigator Harry Markopolos, famous for his warnings about Bernard Madoff’s Ponzi scheme, has accused General Electric of a $38 billion fraud; General Electric described the claims as “meritless”
* US President Donald Trump has expressed interest in purchasing Greenland, according to reports in The Wall Street Journal
* Flexible office space provider WeWork filed for a multi-billion dollar stock market listing. The company made a loss of $905 million in the first half of the year
* The Turkish Army pension fund was announced as the preferred bidder for British Steel, owner of the Scunthorpe steel works, which went into receivership in May
Brexit and European politics
* The Institute for Government think tank has warned that it is very unlikely the UK will be able to leave with a deal on 31 October and MPs have limited options to block the government should it pursue a no-deal Brexit
* Commons speaker John Bercow said he will “fight with every bone in his body” for MPs to have their say on Brexit. A legal challenge has also been lodged in the courts to prevent the suspension of Parliament
* With insufficient time to hold a general election prior to leaving, MPs opposed to a no-deal Brexit are resting their hopes on forming a ‘government of national unity’ which would request an extension to Article 50 from the EU, giving sufficient time to hold a general election
* Labour Party leader Jeremy Corbyn indicated he plans to call a vote of no confidence when Parliament returns from recess. He wrote to other opposition parties setting out his proposals for a temporary government – with himself as prime minister
* MPs from other parties favour a more neutral figure, with veteran politicians Ken Clarke or Harriet Harman seen as possibilities. Any unity government would likely require the near unanimous support of all opposition MPs along with a handful of Conservative MPs willing to vote down the current government
* Prime Minister Boris Johnson accused MPs of “collaborating” with the EU to prevent Brexit
* US national security adviser John Bolton claimed the UK would be “first in line” for a trade deal with the US
* US house speaker Nancy Pelosi indicated that Congress would not approve any trade deal if it violated the Good Friday Agreement that was a key part of the Northern Ireland peace process
* Former Conservative MP Sarah Wollaston joined the Liberal Democrats, saying it was the best way for her to fight for the UK to remain in the EU
And finally… a disgruntled Waitrose shopper made a complaint after returning a luxury loaf of bread saying “too many seeds” had ruined its “character”. The lady is said to have complained at the customer service desk for 15 minutes before she was granted a refund in what one female onlooker said was the most middle-class complaint ever – sour-dough