It’s Not All Doom and Gloom for the World Economy Even as Bears Roam
(Bloomberg Businessweek) -- Watch out: The bears have come out of hibernation and are crashing all the holiday parties.
Just 12 months ago, the global economy looked to be in robust health. The International Monetary Fund hailed the synchronized upturn, with even traditional laggards such as the euro area and Japan looking sprightly.
Fast-forward to the eve of 2019, and warning signs are flashing in financial markets that a worldwide slowdown is around the corner. The S&P 500 is on course for its second-worst December on record, while the price of a barrel of oil has plunged to about $50. Morgan Stanley is warning of an “earnings recession.”
There’s plenty to justify the gloomy shift. A long but patchy period of expansion is showing signs of fatigue, while central banks are turning off the easy-money spigot. And despite a temporary cease-fire, the U.S.-China trade war is damping growth in global commerce and probably investment as well.
Purchasing managers at manufacturers worldwide are nervous about the outlook for orders. A gauge of their sentiment produced by JPMorgan Chase & Co. and IHS Markit Ltd. stands at 52, the lowest level since September 2016.
While President Trump and Chinese President Xi Jinping declared a 90-day ceasefire in their tit-for-tat tariff assaults after their recent meeting in Buenos Aires, most duties haven’t been rolled back. The two sides remain far apart on issues like intellectual-property protections and China’s ambitions to achieve dominance in leading-edge industries such as artificial intelligence and electric cars.
Central bankers, who are well-practiced at reading the economic tea leaves, are sounding notes of caution. European Central Bank President Mario Draghi sees risks to growth mounting in the euro zone, though that didn’t deter him from announcing the end to the ECB’s €2.6 trillion ($3 trillion) bond-buying program in December. Yi Gang, the governor of the People’s Bank of China, says his country is also facing headwinds: New data show that retail sales and industrial production weakened in November.
The preponderance of the evidence, according to a report by Pacific Investment Management Co., is that global growth is now past its peak. That was also the message in a Dec. 19 earnings call during which FedEx Corp. executives announced the company was slashing its profit forecast and paring international airfreight capacity.
But are things really as bad as these bankers and businesspeople are making out? Even with caveats, the IMF is predicting global growth of 3.7 percent next year, the same as in the two prior years. And while several major banks have downgraded their 2019 forecasts in recent months, none is predicting that a global recession is on the horizon. The economics team at Nomura Holdings Inc. went as far as to call a “take-off” in global growth one of the “grey swans” of 2019 (in other words, unlikely but not impossible).
Here are a few reasons to feel bullish about the new year. It’s possible that the U.S. and China will make a trade deal. Beijing has made some conciliatory gestures, such as resuming its purchases of American soybeans and lowering duties on U.S.-made cars, and Treasury Secretary Steven Mnuchin told Bloomberg News that the two sides plan to hold talks in January.
Cheaper oil is also something to celebrate (unless you’re a petrostate), because it’s effectively a tax cut for consumers and businesses. Plus money is still relatively cheap—JPMorgan Chase’s gauge of interest rates in developed economies is still 2 percentage points below its precrisis average—and there’s reason to believe it will stay that way for a while longer.
While inflation in the U.S. and Europe has been converging toward central bank targets, there are few signs that it’s poised to spiral out of control. That diminishes the risk that monetary authorities will have to quickly raise rates, causing growth to stall out. The U.S. Federal Reserve has hiked rates four times this year, yet Chairman Jerome Powell has hinted that the current cycle of tightening could come to a halt in 2019.
Of course, central banks don’t control all the economic levers. In the U.S., Trump’s tax cuts were an important driver of growth in 2018, though their effects are starting to fade. Canada, Germany, Italy, and several Asian countries are also using fiscal policy to support their economies. “The days of easy monetary policy are over, but governments are looking to take over the reins to sustain growth as downside risks multiply,” says Dana Peterson, an economist at Citigroup Inc.
At Morgan Stanley, the thinking is that, after taking a battering in 2018, emerging markets will again become the main engines of global growth. That would require the stimulus measures being deployed in China to perk up demand for imports.
Perhaps the biggest reason to feel upbeat about next year is the state of the labor markets. Worldwide unemployment of about 5 percent is the lowest since 1980, according to UBS Group AG. “I tend to be more optimistic than a lot of folks,” says Nathan Sheets, a former official at the U.S. Department of the Treasury and the Fed who’s now chief economist at PGIM Fixed Income. “The guy on the street says, ‘I’ve got a job, got my paycheck.’”
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