The trade tussle between the US and China is far from over. In fact, after US President Donald Trump’s latest decision to impose more tariffs on the latter, the situation has become worse. Going by foreign brokerage house Morgan Stanley’s estimate, as tension continues to escalate, the global economy may just be three quarters away from a recession.
Sharing a similar concern, DBS Bank analyst Eugene Leow said in an email response that the trade war had probably lasted a lot longer than many market participants initially expected. “We do not think that a quick resolution will come to pass. Accordingly, policy makers will have to deal with this additional headwind in an environment of already weak growth."
A variety of negative factors, including the trade war and uncertainty relating to Brexit, have taken a toll on the global economy. The International Monetary Fund recently revised 2019 global gross domestic product forecast lower yet again to 7%.
Consequently, corporate confidence has slipped to multi-year lows. The latest JP Morgan Global Composite PMI survey showed that the future output index – which monitors companies’ optimism regarding the year ahead – dropped to a fresh survey low in July. “Levels of confidence were also at their lowest ebbs recorded at manufacturers and service providers alike," said the survey report.
With that, the onus to revive global growth continues to be on central banks across the world via more interest rate cuts. A report released by UBS Ltd on 2 August said actual slowing in the real economy from the tariffs and US Federal Reserve Chairman Jerome Powell's fear of an uncertainty shock would work in tandem. “With the information now in hand, we recant the view that further cuts are not likely."
While global central banks are trying to boost the fragile global economic growth with monetary stimulus, easy money may not be enough to turn things around.
According to economists at the London-based research organisation Capital Economics, the strong performance of both equities and government bonds this year reflects a view that monetary easing will put the global economy back on track very soon – an outlook that seems too benign.
“Central banks around the world are likely to loosen further, keeping sovereign yields very low. But we doubt that will bring about a clear economic improvement as quickly as investors hope. With that in mind, we think that corporate earnings will fall well short of expectations later in 2019, hitting equities and corporate bonds," said in a note on 1 August.
Concurring, the Morgan Stanley report dated 5 August said, “Global central banks, in particular the Fed and ECB, will provide additional monetary policy support. But these measures, while helpful in containing downside risks, will not be enough to drive a recovery until trade policy uncertainty dissipates."
In short, the only way in which the global economy could see a meaningful recovery is a truce between the US and China. But for now, that seems unlikely.