Monday 6 August 2018 2:59 pmSchroders Talk

3 reasons why the world economy is slowing

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I am group chief economist at Schroders.

Losing momentum

Although near-term activity indicators remain stable, growth has been less synchronised in 2018 than it was in 2017 when major regions were all accelerating. Asia and Europe appear to be slowing, and Friday's jobs data in the US suggests that the world economy is entering a soft patch.

We see three main factors as contributing to what seems to be a summer hiatus.

1. Cooling China

Certain indicators imply that the Chinese economy could be slowing faster than the latest GDP figure suggests. Although Q2 GDP was only 0.1 percentage point weaker than Q1, more recent data such as monthly retail sales, investment and exports all indicate that a greater slowdown in activity could await us during Q3. Given the role China plays in Asian and global growth, this will have implications for the rest of the world.

2. Weaker commodities

A drop in industrial metals prices, which have lost about 14 per cent since the end of June, is a sign of weaker industrial production. Because prices reflect the level of industrial production, they are a reasonably reliable indicator of activity. Industrial production is a key component of economic growth so less production will weigh on overall growth. Current metals prices suggest that G7 production will stall in the coming months, with consequences for global growth.

3. Stronger dollar

Trade growth (another important constituent of global growth) depends very much on the affordability of the dollar. As the dollar becomes more expensive, countries that transact trade in dollars will be hurt and trade may slow as a result, with knock-on effects for global growth. Furthermore, many countries borrow in dollars and a stronger dollar will mean borrowing becomes more expensive, which will further weigh on growth.

Temporary or permanent?

We see it more likely that these effects are temporary rather than permanent. In our view, what we’re seeing at the moment is a summer lull rather than anything more sustained. Some of the weakness in metals prices could be related to the steel tariffs; there is some evidence that firms increased their orders before the steel and aluminium tariffs came into effect on 1 June and are now trimming back. Furthermore, underlying orders in the world economy are still robust, employment is strong and confidence high suggesting that underlying demand remains intact.

Trade tensions could scupper growth

The risk to this outlook is that trade tensions cause business confidence to falter and companies cut back on their capital spending. Strong capital spending has played an important part in the global economic upswing, but if businesses take fright at political developments, they could well stop spending in the face of uncertainty, with consequences for global growth.

News that the US and EU have reached a deal (even if it is only to talk) is positive, but tensions with China remain high. In our view, the fact that President Trump has put together a $12 billion package to support farmers affected by recently-introduced tariffs, suggests the president is preparing for a drawn-out battle with China. It looks like the US-China trade war is still heating up.

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