Fathom Consulting’s latest Global Economic and Markets Outlook (GEMO) central scenario envisages a continued pause in global trade growth, resulting from the ongoing uncertainty around the US and China’s trading relationship. Though this will — and has — been a drag on GDP, we see investors’ fears of a global recession as overblown.
Our estimates point to a sharp reversal in trade growth, from 2% above trend in the middle of last year to 2% below trend now. While this fall is significant, it pales in comparison to the Global Financial Crisis, which was the deepest global recession in decades. The effects of the slowdown have not been distributed evenly. Countries more exposed to trade and those with larger manufacturing shares have been the worst affected, as the tendency for manufactured goods to be traded across borders leaves the sector especially susceptible to swings in international trade. It is therefore hardly surprising that industry has slipped into recession across the OECD economies. By contrast, the services sector has (thus far) remained relatively cocooned from this shock.
To study the distribution further, we constructed a model using bilateral goods exports flows between 171 countries. It showed that, of the major advanced economies, Germany is the most susceptible to a slowdown in global trade, and its vulnerability has doubled since 2000. This is partially captured by the higher share of GDP now accounted for by goods exports, as demonstrated in the chart below. The model predicts that a 1 percentage point reduction in world trade would knock nearly 1.2% off the level of German GDP in the long run.
In comparison, the US would emerge relatively unscathed. The US’s closed economy is also marginally less vulnerable than it was in 2000. As seen in the chart below, a divergence has emerged between the growth rates of the US and Germany. Though this also reflects the fiscal stimulus package, in the form of corporate tax cuts, delivered by the US government towards the end of 2017, the hard data coming out of the US has been more stable. In GEMO, we forecast 2019 growth of 2.3% and 0.4% in the US and Germany respectively. The IMF has recently revised down its projections closer to our view, cutting forecasts of both economies by 0.2 percentage points to 2.4% and 0.5%.
Our risk scenario entails things deteriorating further, causing productivity and investment to fall and ultimately leading to a global recession. We estimate that the 15-percentage-point rise in trade’s share of global GDP since 2001 increased total factor productivity by 9%. If firms, who can see the long-term impacts of the trade slowdown on productivity, believe the trade slowdown will get worse from here, they will cut investment immediately due to lower marginal product of capital. This could lead to a reduction sharp enough to push the global economy into a recession.
There are indeed signs that investors are getting nervous. The S&P 500 regularly changes track in line with trade news. Fathom’s US Economic Sentiment Indicator (ESI), which uses a variety of surveys to create a composite measure of confidence, has dropped sharply in recent months. As mentioned above, this is partly due to the boost of fiscal stimulus coming to an end but is exacerbated by trade tensions. Governments are aware. The Trump administration has negotiated so-called ‘mini deals’ with China and Japan to reassure businesses that it does want an eventual end to the trade war that it started. These deals are not long-term solutions however and must be followed with substantial agreements to truly rule out our risk scenario. If not, these tensions could herald new era of beggar-thy-neighbour policies and trigger a sharp fall in globalisation. This is not our central case, but its likelihood is increasing.
The charts in this article have been created using Chartbook on Datastream. The Chartbook, created and maintained by Fathom Consulting, is a library of over 9000 charts, containing up-to-date macro and financial market data for over 170 countries. Whether it is a particular topic, country or variable you are interested in charting, the Chartbook has everything you need. Simply type search ‘cbook’ into your Eikon search bar or click the ‘Chartbook’ tab on Datastream to find out more.
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