A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. To subscribe and/or view previous editions just google ‘Deloitte Monday Briefing’.
Last week data showed that the number of people in employment in the UK has fallen by 56,000. Long the standout success in Britain’s recovery, the jobs market is feeling the chill winds of weaker growth. Brexit has played a role, but weakening UK activity is small part of a wider, global story.
The synchronised economic upswing of 2016-18, which lifted rich and developing countries alike, has gone into reverse. Not only are Germany, Britain and the US cooling – so too are India, China and Russia.
On the face of it the International Monetary Fund’s (IMF) latest forecasts look fairly reassuring. They show the global economy growing by 3.0% this year, down from 3.6% last year and the weakest reading since the financial crisis, before picking up to 3.4% in 2020.
The global recovery started in 2009 and is long in the tooth. The world is overdue a slowdown. The fact that the IMF, and most economists, are forecasting a short-lived downturn, a classic ‘soft-landing’, might seem like good news.
But when growth is softening, as it is now, forecasts are more than usually lagging and fallible. (The IMF, and most economists, did not forecast the last recession, which was the biggest since the 1930s, until it had almost arrived.)
What matters more than the IMF’s forecasts is their analysis. It is downbeat. The slowdown has come faster than the IMF expected with the effects of trade tensions proving more pervasive and damaging than the IMF, or most economists, had anticipated. Rising tariffs and the increasing politicisation of trade policy have sown uncertainty and hit exports. Manufacturing, with its heavy reliance on export sales, has been a conspicuous casualty with output slowing sharply across the West. Globalisation, at least measured in terms of trade, has almost ground to a halt.
Germany’s precipitous downturn, which will make it one of the rich world’s slowest growing economies this year and next, is largely due to weaker exports. Its huge trade surplus, success in the Chinese market and prowess in auto manufacturing have long been sources of strength. As global trade and Chinese demand sag, and with environmental worries and the downturn weighing on car sales, they have become vulnerabilities.
Business sentiment is heading down around the world. Uncertainty about future demand makes investing riskier. For businesses seeking to strengthen their balance sheet for the downturn cost cutting, not investment, is the priority.
So far consumer demand has held up reasonably well. But the consumer cannot decouple forever from the fortunes of the private sector. Last week’s disappointing UK jobs data show that, eventually, wages and jobs reflect what is happening in business.
Prospects for emerging economies have also weakened. The Chinese economy grew by 6.0% in the year to the third quarter, a heady rate by Western standards, but China’s slowest growth rate in 30 years. Prospects for a number of major emerging economies, including India, Brazil, Russia, Argentina and Indonesia have weakened since the beginning of the year.
With interest rates in the West at historically low levels the scope for policymakers to counter weaker growth with monetary stimulus is less than it was on the eve of the last downturn. Central banks’ firepower is depleted though not exhausted. This means that more of the burden of resisting the downturn is likely to fall on fiscal policy, in the form of increased government spending and tax cuts.
The Trump administration implemented sweeping tax cuts last year. From a policy point of view it was conspicuously ill-timed, coming at a time of near full employment and adding to an already strong recovery. More recently China has leaned against its slowdown by cutting taxes and Britain’s new chancellor has effectively jettisoned public sector austerity. With many governments in Europe facing negative interest rates on their debt, and therefore being paid by the private sector to borrow, others seem likely to follow the UK.
It is possible to imagine things getting better from here. The Federal Reserve and the European Central Bank are easing monetary policy. Fiscal ease is likely to follow in a number of countries. The mercurial character of the current US administration, and China’s desire to bolster its economy, could yet deliver a US-China trade deal. Across most of the West unemployment is low and consumers are in fairly good spirits.
Yet for now at least, the risks to global growth are tilted towards things being weaker, not stronger, than expected. The risk of the slowdown becoming a recession is rising.