As President Donald Trump intensifies his trade war with China, and as factories slow in major industrial nations, world commerce is deteriorating rapidly, a perilous development that threatens the health of the global economy. Most economists still predict that a global recession remains unlikely, even us growth slows. But in our opinion the dangers are clearly mounting, threatening to spread from the factory floor to households in many major economies. The latest sign arrived as the World Trade Organization (WTO) slashed its forecast for trade growth for this year and next.
World Trade in merchandise is now expected to expand by only 1.2% during 2019, in what would be the weakest year since 2003, when it plunged by nearly 13% in the midst of the worst global financial crisis since the Great Depression. Only six months ago, the organization was forecasting more than double that pace of growth, a 2.6% expansion in merchandise trade.
The WTO warned that intensifying trade conflicts posed a direct threat to jobs and livelihoods, while discouraging companies from expanding and innovating. Both the US and China have seen a pronounced cooling in commercial activity in recent months, a trend exacerbated by the tariffs they have imposed on each other’s exports, raising costs of businesses and consumers and discouraging investment.
Eurozone’s internal trauma
In Europe trade is being stymied by fear that Britain may be on the verge of a tumultuous exit from the European Union, absent a deal governing future commerce across the English Channel. We at Calvin • Farel certainly believe that we can make a strong case that the risks of a global recession have increased over the last few months based on a combination of indicators for weakening global growth. And that means we are more pessimistic about where World Trade should trend.
A closely-watched gauge of US manufacturing revealed that factories had slowed further in September, marking the second straight month of decline. Stocks dropped after that report, eliminating gains seen earlier. Money already start shifting into Treasury bonds, a traditional safe haven, indicating that investors were willing to accept the prospect of smaller rewards in exchange for refuge from risk.
Dollar’s unwelcome strength
Money moved into the dollar, another reach for safety, lifting its value against other currencies. A stronger dollar makes US goods more expensive in world markets compared to those produced in other countries.
Trump has long be moaned the stronger dollar as a threat to US factories. He took to Twitter to excoriate the Federal Reserve chair he nominated, Jerome Powell, blaming him for the strong dollar while accusing the central bank of keeping interest rates too high.
The Fed, after raising interest rates four times in 2018, has dropped them twice this year after a decade, though not enough to satisfy Trump.
As the Fed lowered rates last month, Powell said his shift toward easier money had been triggered by concerns that the global economy was weakening, in part because of “trade policy tensions”. The central bank chief seemed to be suggesting that Trump had the power to restore economic vigor himself. He merely had to forswear his trade war.
But few including us imagined that happening soon. Trade conflicts heighten uncertainty, which is leading some businesses to delay the productivity – enhancing investments that are essential to raising living standards.
Trade will grow by 2.7% next year, the organization forecast, a tad below the 3% it envisioned in April. Yet this was a moving target, with most of the motion headed in the wrong direction, Risks to the forecast in our opinion are heavily weighted to the downside.
Tit for tats continue
In April, when the WTO released its last forecast, sentiments were buoyed by hopes that Washington and Beijing where nearing a deal to resolve their trade disputes. That now seems like a long time ago. Many experts are sceptical that an agreement will be struck in the near future, amplifying concerns about a range of indicators that the global economy is weakening – including a slowdown in freight and quieter factories. The risk is in our opinion that a slowdown in factory orders could halt the growth of wages and bring job reductions.
The trade war is already menacing many economies that are dependent on exports. Singapore’s economy is now contracting. Japan, South Korea and Taiwan all sell large volumes of manufactured goods to China. They have suffered lower sales as China slows.
Germany has become a prominent source of concern in Europe as its factory orders plunge, a trend that deepened in September. German manufacturing troubles stem in part from the fact that Chinese companies facing tariffs on exports to the US are shrinking their purchases of German – made machinery. German companies are also reluctant to invest given Trump’s active threats to expand the trade war to include tariffs on German cars sold in the US.
As German companies produce and export less, some have already started cutting jobs. This in our opinion is likely to dampen German consumer spending, further contributing to weakness in other European economies.