Is the world economy slowing?
Although near-term activity indicators remain stable, growth has been less synchronised in 2018 than it was in 2017 when major regions were all accelerating. Now Asia and Europe appear to be slowing, diverging from the US, which is still experiencing strong growth.
We see three main factors as contributing to what seems to be a summer hiatus.
1. Cooling China
Certain indicators imply that the Chinese economy could be slowing faster than the latest GDP figure suggests. Although Q2 GDP was only 0.1 percentage point weaker than Q1, more recent data such as monthly retail sales, investment and exports all indicate that a greater slowdown in activity could await us during Q3. Given the role China plays in Asian and global growth, this will have implications for the rest of the world.
2. Weaker commodities
A drop in industrial metals prices, which have lost about 14% since the end of June, is a sign of weaker industrial production. Because prices reflect the level of industrial production, they are a reasonably reliable indicator of activity. Industrial production is a key component of economic growth so less production will weigh on overall growth. Current metals prices suggest that G7 production will stall in the coming months, with consequences for global growth.
3. Stronger dollar
Trade growth (another important constituent of global growth) depends very much on the affordability of the dollar. As the dollar becomes more expensive, countries that transact trade in dollars will be hurt and trade may slow as a result, with knock-on effects for global growth. Furthermore, many countries borrow in dollars and a stronger dollar will mean borrowing becomes more expensive, which will further weigh on growth.
Temporary or permanent?
We see it more likely that these effects are temporary rather than permanent. In our view, what we’re seeing at the moment is a summer lull rather than anything more sustained. Some of the weakness in metals prices could be related to the steel tariffs; there is some evidence that firms increased their orders before the steel and aluminium tariffs came into effect on 1 June and are now trimming back. Furthermore, underlying orders in the world economy are still robust, employment is strong and confidence high suggesting that underlying demand remains intact.
Trade tensions could scupper growth
The risk to this outlook is that trade tensions cause business confidence to falter and companies cut back on their capital spending. Strong capital spending has played an important part in the global economic upswing, but if businesses take fright at political developments, they could well stop spending in the face of uncertainty, with consequences for global growth.
News that the US and EU have reached a deal (even if it is only to talk) is positive, but tensions with China remain high. In our view, the fact that President Trump has put together a $12 billion package to support farmers affected by recently-introduced tariffs, suggests the president is preparing for a drawn-out battle with China. It looks like the US-China trade war is still heating up.
This is a summary version of our Economics team's monthly Economic and Strategy Viewpoint for August 2018.
Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.