As the difficult trade negotiations between China and the United States drag on, they are causing a slowdown of global business and therefore, of powerful exporters, notably China and Germany. Germany’s gross domestic product fell by 0.1% in the second trimester, while the amount of exports reported in August fell by 8% in one year.
China’s economic recovery has not been able to counteract the negative effects of this situation entirely. Growth in China has not collapsed, but economic activity indicators are not at the expected level. Growth in industrial production in the last year is lower than expected—4.8% as opposed to 6%. Retail sales went up 7.6% in a year instead of the 8.6% that was hoped for. Investment is up 5.7% in a year while analysts were hoping for 5.8%. Caution prevails in guiding China’s economic actors, and that has an impact on growth.
Doubts about Central Banks
Some investors are coming to doubt the ability of central banks to handle the situation and think that the use of accommodative monetary policies in fact presents serious risks.
America’s attraction to protectionism, the end of several decades of spectacular growth in China, and the progress of central banks in new areas make up enough disruptions to send the markets into uncertainty, bringing 10 years of American and German growth down to +1.5% and -0.67%, respectively.
Up against the fear of a major recession and a severe beating of the markets, these yields almost seem attractive to a part of the financial community. The global economy will need to find a new balance, and the transition will be painful for some.
An Optimistic Vision
A downturn is in fact possible, but is it the most likely scenario? It is highly likely that the cycle of worldwide growth will continue. The inverted yield curves are more a sign of a negative outlook than they are an indicator of a major slowdown to come. What is behind such a vision of the future?
We must first remember that the American economy’s numbers are satisfactory. The ISM Non-Manufacturing index is at 53.7%, and the ISM Manufacturing index is at 51.2%. Job creation each month is still strong—193,000 in June and 164,000 in July, signs of consumer confidence are at a high, and American companies’ results exceeded expectations in the second trimester; 77% of S&P companies reported results that were better than expected, with earnings per share up 1.7% from last year.
Chinese and American authorities are also continuing trade negotiations. Donald Trump wants a diplomatic victory going into 2020, and China wants to continue to grow its economy. It is an excellent bet that we will see a deal. Speaking of China’s recovery, it should be amplified (by fiscal and monetary measures) and better oriented, notably toward small businesses and the deployment of infrastructure.
Finally, accommodative monetary policies present, in our opinion, more advantages than risks. For example, the near certain extension of monetary easing in the Eurozone lends strong support to the European economy and its markets. Sustainable low financing conditions are welcome in this time of uncertainty, and European banks are adapting their models to this now sustainable environment.
This could be accompanied by a fiscal stimulus, as some German employers are asking for, even though, at this stage, we can only work with hypotheses, given the reluctance of politicians outside of Germany to address the question.
Florent Delorme is a macroeconomic analyst at M&G Investments.