Sticky patch for the world economy

Financial conditions have also turned more relaxed after tightening into the end of last year, with the MSCI World Index of stocks up almost 9 per cent this year.
Financial conditions have also turned more relaxed after tightening into the end of last year, with the MSCI World Index of stocks up almost 9 per cent this year.PHOTO: AFP

Some optimism for 2019 but US-China trade war, Brexit will affect outlook, say analysts

LONDON • The world economy risks remaining weak for a bit longer. Last Friday alone, reports showed the slowest US hiring in more than a year, a slump in Chinese exports and an unexpected decline in German factory orders.

With economies already undershooting expectations by the most since 2013 and the Organisation for Economic Cooperation and Development slashing its forecasts, worries are mounting that the recent slowdown will last for longer, although recession fears for now remain limited.

The soft patch puts the United States and China under pressure to settle their trade war, which has bludgeoned sentiment, and leaves central banks needing to keep monetary policy looser than they were planning into this year.

Such forces may still prove enough to drive a pick-up and next week witnesses further health checks ranging from retail sales data in the US to industrial statistics from China and the euro zone. "The trends in the global economy have certainly concerned markets,'' said Investec chief economist Philip Shaw in London. "It's material enough to make a difference to the policy outlook."

The week ended with news that US payrolls grew just 20,000 last month, way below the 180,000 median forecast in a Bloomberg survey of economists.

Deutsche Bank is already warning the US economy could grow less than 1 per cent this quarter and the bout of labour market weakness will sew worries about the spending power of consumers. Today in Washington, the government will release retail sales data for January, after December witnessed the worst slump in nine years.

Elsewhere, exports from China tumbled almost 21 per cent last month, the most in three years, while German factory orders unexpectedly dropped 2.6 per cent in January, the most since June.

That was just one day. Manufacturing purchasing manager indexes are in contraction territory in China, Japan and the euro area, where there's mounting concern that the bloc's economy and markets risk repeating Japan's lost decades of growth.There are caveats. US wage gains were the fastest of the expansion last month, and JPMorgan Chase & Co predicts salaries in rich nations will start advancing by more than 3 per cent this year.

Financial conditions have also turned more relaxed after tightening into the end of last year, with the MSCI World Index of stocks up almost 9 per cent this year.

"There's a case that as we move through this, that growth will pick up in the second half of the year," said Mr David Hensley, director of global economics at JPMorgan in New York. "There are supports to keep things from getting too weak."

Much will depend on whether Presidents Donald Trump and Xi Jinping can resolve their trade dispute, clearing a fog of uncertainty that's stopping businesses from investing and hiring. If the United Kingdom can avoid tumbling out of the European Union without a divorce deal, that would also help.

Mr Trump postponed an increase in tariffs that had been scheduled to be imposed on China this month, but no date has been set for the two leaders to meet and much remains unsettled. Confidence that differences will narrow is one reason Morgan Stanley economists say this quarter will mark the trough of the global slowdown.

Another case for optimism that the worst may soon be over is that some governments and central banks are starting to dole out aid. The problem there is that they will then have less firepower to deploy if growth really falters.

China last week announced a cut to its value-added tax of as much as 800 billion yuan (S$162 billion) as it lowered its goal for growth to a range of 6 per cent to 6.5 per cent for this year, down from about 6.5 per cent last year.

And the European Central Bank became the first of the major central banks to unveil more stimulus in the form of new cheap loans for banks, which came alongside a commitment not to raise interest rates until 2020.

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A version of this article appeared in the print edition of The Straits Times on March 11, 2019, with the headline 'Sticky patch for the world economy'. Print Edition | Subscribe