Headlines still worried, momentum a little better

Bob Baur

Bob Baur

Principal Global Investors has released its Economic Insights for the month of September.

Writing in the note to investors, Chief Global Economist, Dr Bob Baur, said that the world economic slowdown refuses to fade, however, economic momentum feels better.

The tug-of-war

“For some months, the world economy has seemed at a crossroads. With industrial activity stagnating, confidence downcast, trade tension lofty, profits flat, and stock markets under pressure, the gloomy stage feels set for recession,” wrote Dr Baur.

“And yet. Pulling the economy back from the brink were robust household spending, solid labour markets, healthy wage growth, super-low long-term interest rates, and easier central bank policy. The global economy struggles to find a bottom to this long-running slowdown.”

Is China stabilising?

While some headlines describe the recent August data as disappointing, Dr Baur pointed out that there’s been monthly sequential progress since the low earlier in the year:

“Industrial production had a nice 0.4% or so bounce in August from July, even though year-over-year growth fell. Fixed investment was also up sequentially the last few months.

“Business surveys have ticked higher with manufacturing now showing expansion. Further, Chinese data on industrial profits, exports, nominal gross domestic product (GDP), producer prices, crude steel, and cement output, among other series, haven’t declined as severely as those of the industrial recession of 2015. That’s also true of private surveys of United States company sales to China.”

Will the US enter a recession?

“Geopolitical risks are large and well-known. But the biggest recession risk we see is a deterioration in corporate profits. The portion of chief executives or financial officers who expect a recession in the next year has stayed above 60% since January. For some time, we chalked all that up to trade tensions, tariffs, and related uncertainties. However, recent downward revisions to U.S. corporate profits suggest that margins have been shrinking. Business sentiment is closely tied to profit growth. Overall profits have been mostly flat for several quarters and are below their 2018 peak,” said Dr Baur.

China and trade tensions

“When China joined the World Trade Organization in 2001, the country added hundreds of millions of low-cost workers to the world labour supply. U.S. companies moved production facilities to utilise those workers and export their lower-cost goods to the West,” said Dr Baur.

“Chinese wages grew very fast as more global companies set up shop there. Chinese workers gradually became less competitive. Then slow wage growth and the popular narrative of stagnant income created a political backlash that’s still playing out in the U.S. and greater Europe. Today’s trade tensions are a consequence of that backlash.”

Dr Baur said he expects developing momentum in China and the U.S. to broaden into a modest world upturn into 2020.

“With companies under profit pressure and uncertainty still high, any revival that gets underway could run out of steam late next year or early in 2021. That might set the stage for a mild recession. The long rise in corporate debt, propelled by super-low interest rates, could bring credit strains and worsen a nascent downturn. For now, though, let’s enjoy the recovery and see what happens.”

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