On 28 and 29 June, the major global economies will meet at the G20 summit in Osaka, Japan. The G20 summit brings together systematically important industrialised and developing economies to discuss the key issues in the global economy. The big issue facing the global economy is the trade dispute between the US and China and not surprisingly the markets expect there to be regular dialogue behind the scenes between the US and China. Any announcement that trade talks have been resumed will be met with relief from both markets and businesses.
The US economic data is continuing to show the US is in a period of expansion, with the latest retail sales data suggesting that the US consumer is in good financial shape. However, although US unemployment remained unchanged in May, at 3.6%, the US economy created far fewer jobs than expected, with only 75,000 jobs being created rather than the 185,000 that was expected by the markets. Wage growth also slowed in May, with average hourly earnings increasing 0.2%, which has lowered the annual increase in wages to 3.1% from 3.2%. The ongoing trade dispute with China is clearly creating an economic headwind that the US and global economy can ill-afford.
The increasing economic risk can be illustrated in the latest Federal Open Market Committee meeting, in which the Federal Reserve (Fed) kept interest rates unchanged in the 2.25%-2.5% range, but commented, “uncertainties about the outlook have increased”, and the Fed “will act as appropriate to sustain the expansion”. The closely watched Fed statement included a marked shift in language. No longer did the Fed say it would remain “patient” in assessing economic data. The Fed’s change in tone comes after comments from the US President, Donald Trump, who stated that the strong US Dollar is hurting US companies and an increase in interest rates would encourage foreign investors to buy the US Dollar, thereby, strengthening the currency further.
Whether the Fed reduces interest rates or not, depends on the outcome of the G20 summit and its potential impact on the economy.
Brexit and the UK economy
The main focus in the UK has been the changing political landscape and the uncertainty surrounding Brexit. The Conservative Party are in the process of selecting a new leader, who will replace Theresa May as Prime Minister. Although Boris Johnson is the clear favourite it is still not clear how he or any of his rivals will obtain the approval from Parliament for their plans for the UK to leave the European Union. The uncertainty surrounding Brexit is hitting business investment. The UK economy contracted in April, following a “dramatic” decline in car production and a weakening of Brexit stockpiling activity. UK Gross Domestic Product (GDP) declined 0.4% month on month, the worst fall since March 2016 and lower than economic forecasts.
The British Chamber of Commerce is forecasting economic growth for the UK at 1.3% in 2019, and 1% in 2020. The currency is reflecting the uncertainty surrounding Brexit with Sterling weakening against the major currencies. The economic forecasts depend on the outcome of Brexit and whether it is an orderly exit or not.
Despite the weaker economy, wage growth in the three months from February to April beat market expectations, rising 3.4%, year on year. After taking into account inflation, wage growth was 1.4%. The unemployment rate remains unchanged at 3.8% and has not been lower since the October to December 1974 period.
There are also growing concerns over the Eurozone economy and this has been highlighted by the latest economic data for the German economy, with industrial production declining 1.9% in April, compared with the previous month. The Bundesbank is also more downbeat and is now forecasting the German economy to grow by 0.6% in 2019, compared with the forecast of 1.6% that was made in December.
Because of the weakness in the Eurozone economy, the European Central Bank (ECB) has kept interest rates unchanged. The ECB President, Mario Draghi, has suggested that if the economic data fails to improve, then the next step will be for the ECB to provide monetary stimulus and this could be as soon as July.
Japan monetary policy
The Bank of Japan (BoJ) has also kept monetary policy unchanged, but has stressed that global risks to the economy are increasing, largely due to trade tensions. The BoJ has signalled that they are leaning towards increasing monetary support.
There are also question marks towards the health of the Chinese economy. Although China’s factory activity expanded at a steady, but modest pace in May, some analysts believe that firms may be front-loading exports to avoid higher tariffs, masking underlying weakness in the economy.
The recent attack on two oil tankers in the Gulf of Oman, plus the downing of a US drone by Iran have increased tensions between the US and Iran. Although no one has claimed responsibility for the attack on the oil tankers, the US has claimed it has evidence that Iran was responsible. The tensions between the US and Iran could escalate into something more serious.
The risks towards the global economy have increased, largely due to US-China trade tensions and this can be seen in the latest economic numbers. The major central banks, particularly, the Fed, ECB and BoJ are all preparing to increase support for their economies through monetary policy. Therefore, the outlook for the global economy depends on a resolution to the US-China trade dispute, which means that the key to the global economy will be the G20 summit, and hopefully, a favourable outcome between the US and China.