It's time to brace

By Nicky Sullivan

In early March, the Organisation for Economic Co-operation and Development (OECD) issued its interim economic outlook for 2019, in a report that contained few rays of light to brighten up the generally gloomy prospects for the year ahead and beyond.

In brief, the gas is going out of global growth, which has been revised downwards for almost all G20 economies* to 3.3% in 2019 and 3.4% in 2020.

At the same time, the factors behind the slowdown are not going away.

The world is trading less than before as companies in many countries file fewer orders and the slump in global manufacturing activity is hitting countries such as Germany and Japan particularly hard. Trade restrictions introduced last year are having an impact all the way down the line, dragging down growth, investment and living standards, especially for low-income households.

The World Trade Organisation (WTO) also continued its year-long downgrading of the global economic outlook. The WTO Outlook Indicator recorded growth as below trend, with a reading of 96.3, the lowest level since 2010.

The biggest concerns lie around the euro area thanks to tensions around trade questions (Brexit) and falling business and consumer confidence. Fears of a disorderly (so-called “no-deal”) Brexit would substantially raise costs for European economies.

The day after the OECD report was published, the European Central Bank (ECB) took action, pledging to keep interest rates on hold in order to support spending and announcing a new round of “targeted longer-term refinancing operations” (TLTRO-III), essentially cheap loans to banks. The euro fell 0.6% against the dollar, its lowest level since mid-November.

Meanwhile, the ECB’s projections for euro area growth this year plunged on revision from 1.7% last December to 1.1% this March.

China’s gradual deceleration also continues to cause concern. Here, moderated growth of 6% by 2020 (from an average high of 9.55% between 1989 and 2018) continues to make people jittery as a slower China hits growth and trade prospects all over the world.

This makes a report detailed in ‘The Economist’ on March 7 look even more alarming. Economists at the Universities of Chicago and Hong Kong suggest that China has been consistently overstating its industrial output and investment levels by around two percentage points each year between 2008 and 2016. Adding those exaggerations up points to a potential hole in China’s

economy of more than $1.5 trillion.

That said, because the possible misreporting has occurred in relation to investment and industrial output figures, and not consumption, the authors of the report say that it would balance out debt as a ratio of GDP. “Looked at this way, the Chinese economy is smaller but better balanced and thus, perhaps, more resilient.”

In the United States, the year got off to a difficult start thanks to the longest shutdown in American history. Meanwhile, America’s trade brinksmanship with China has not helped shore up confidence.

In December 2018, the Federal Reserve raised interest rates for the fourth time in a year, while cutting its estimates for GDP growth to 2.3%, down from a September projection of 2.5%.

All these indicators are part of a web of machinations giving rise to ever louder whispers that recession is on the way. While there’s no single indicator that can give a clear picture of the direction the economy is taking on its own, a combination of falling business and consumer confidence, slumps in manufacturing output and falling global growth tends to lead towards one conclusion.

It’s time to brace.

*Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the UK and the USA.