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Monday 9 September 2019

global slowdown

Road to recession

From trade balances to Google searches, the metrics to worry about

By Jack Kessler

Paul Samuelson, the first American to win the Nobel Prize for economics, once quipped that the stock market had forecast “nine of the last five recessions” – although there are a range of indicators that can tell us something about where the global economy is headed. Nowadays, they even include Google searches:

Trade is the engine of global growth, but it is slowing. World trade declined by 0.3 per cent in the fourth quarter of 2018, dragged down by President Trump’s trade war with China. Other threats abound, from a British no-deal exit from the EU to the ongoing trade dispute between Japan and South Korea.

Global trade tensions are having a knock-on effect on manufacturing. The Purchasing Managers’ Index (PMI) measures the direction of economic trends in manufacturing, based on monthly surveys of manufacturers. A figure below 50 signals economic contraction.

Worries may have already seeped into the minds of American consumers, pushing the University of Michigan’s US Consumer Sentiment Index to its lowest level in nearly seven years. This could lead to lower growth in consumer spending and therefore the overall economy.

Americans’ total debt (housing and non-housing) rose by $200 billion over the last quarter to $13.9 trillion, a record high. This is nearly ten per cent higher than the previous peak during the third quarter of 2008, when the US economy contracted by 2.1 per cent. US consumers do not have much financial leeway in the event of another recession.

Even at the height of the Great Recession, China’s official GDP growth figure never fell below 6 per cent. It is currently 6.2 per cent, which is still within Beijing’s target range, but Bank of America Merrill Lynch has already cut its forecast for China’s GDP in 2020 to below six per cent.

A worldwide recession is not inevitable. The US service sector is growing, with business activity among non-manufacturers enjoying its biggest single-month increase since 2008.

But the global economy is not well placed to shake off any further escalation in the US-China trade war or any other shocks. Not least because, with interest rates at still near-record lows, policymakers have less room to manoeuvre than they did a decade ago.