The International Monetary Fund (IMF) has warned that economies around the world are growing at their slowest pace since the 2008 financial crash. The IMF has revised its expectations of global growth to 3% this year, down from its July forecast of 3.2%.
US-China Trade Talks
Without doubt, one of the main reasons for the global economic slowdown is the US-China trade war. However, there have been positive developments in the US-China trade talks. Both sides have reported progress on the talks and are working towards a written agreement. The Chinese Vice Premier, Liu He, said, “Stopping the escalation of the trade war benefits China, the US and the whole world. It’s what producers and consumers alike are hoping for”.
The US President, Donald Trump, has said that the two sides have agreed a, “phase one deal”, with China agreeing to buy US agricultural products and address the intellectual property issue. In return, the US has agreed to postpone the next tariff increase on Chinese goods.
The IMF has estimated that a tentative trade deal reached by the US and China could reduce the harm done by the tit-for-tat tariffs imposed by both countries, over the past 15 months.
The US manufacturing sector is without doubt feeling the effects of the US-China trade dispute. This can be illustrated by the latest ISM Manufacturing Purchasing Managers’ Index (PMI), which in September came in at 47.8, the lowest level since June 2009. This marks the second consecutive month of contraction. The new Export Orders Index slumped to only 41, the lowest level since March 2009.
Although the US manufacturing sector is being hurt by the trade tensions, the US domestic economy is continuing to move in the right direction. This can be illustrated by the latest unemployment data. In September, US unemployment decreased to 3.5% from 3.7% in the previous month. This was ahead of market expectations of 3.7%. The last time the unemployment rate was this low was in December 1969.
Although the global trade tensions are impacting the UK economy, the main issue for the UK is the uncertainty surrounding Brexit. Boris Johnson has managed to negotiate a deal to leave the European Union, however, there is difficulty in getting the deal approved by Parliament.
The UK economy is showing signs of an economic downturn. This can be illustrated by the latest UK Services PMI Index, which in September fell to a 6 month low of 49.5, whilst the UK All-Sector PMI Index declined to 48.8 from 49.7. Although the UK output contracted by 0.2% in the second quarter of 2019, it is expected to have returned to growth in the third quarter, so at this stage the UK should avoid recession. However, the UK economy is dominated by the services sector; therefore, a downturn in this vital part of the economy increases the threat of a recession.
Another signal of a slowdown in the UK economy is the latest employment data. After a long period of expansion, the Office for National Statistics commented that employment growth, “cooled noticeably” in the June to August period. The number of people in work for this period unexpectedly fell by 56,000, giving an unemployment rate of 3.9%.
Like-for-like UK retail sales have also shown their worst figures for more than 20 years, with the value of UK retail sales dropping 1.3% in the month of September.
In the second quarter of 2019, the German economy has seen a decline in output of 0.1% and entered a recession. The weakness in manufacturing has started to be felt elsewhere, with activity in the service industry weakening more than expected. The composite PMI Index for the Eurozone’s largest economy fell below the 50 point level for the first time since April 2013. The German economy is not only being hurt from the US-China trade tensions and uncertainty arising from Brexit, but also the structural changes being undertaken in the car industry. The country’s central bank, the Bundesbank, has also said in a monthly report, “Germany’s economic output could have shrunk again slightly in the third quarter of 2019”.
China’s economic slowdown
In the third quarter of 2019, China’s economy grew on an annual basis at 6%, which is its slowest pace in almost three decades. This illustrates the impact of the US-China trade dispute on China’s factory production and investment sentiment.
The global economy is slowing down, but the key issue for the outlook for both the economy and markets is whether the US and China can finalise a trade deal. A US-China trade deal is vital for Donald Trump’s Presidential 2020 campaign. Similarly, to protect their economy, it is in China’s interests to achieve a deal. At the very least, there should be a token deal incorporating China agreeing to buy US agriculture products in return for the US not increasing tariffs, although there are no guarantees there will be a deal.
Although the US-China trade dispute is impacting the UK and Europe, the uncertainty surrounding Brexit is another thorn in the side for both the UK and Europe.
The one thing both the US-China trade negotiations and Brexit have in common is – deal or no deal? The outcome of both these negotiations should have a dramatic impact on the economy and markets.