“With no end in sight, there are significant downside risks to our forecasts for U.S. and global growth,” Bank of America Corp. economists warned clients this week. “If the trade war escalates -- this could include a more explicit currency war -- uncertainty would be considerably higher and financial conditions much tighter.”
Much depends on consumer and corporate confidence.
JPMorgan Chase & Co.’s global manufacturing purchasing managers index already shows contraction. June data on industrial production in Germany, Europe’s biggest economy, showed the biggest annual slump in a decade. The European Central Bank is poised to unleash a renewed round of stimulus as soon as September, potentially including a rate cut further into negative territory, to fight a deepening slowdown.
In the U.S., manufacturing growth has slowed for four straight months and Citigroup Inc. equity strategists have cut their earnings forecast for S&P 500 companies.
Then there are consumers. Those in China and the U.S. have continued to spend, perhaps encouraged to by tight labor markets. But JPMorgan economists reckon the pace of global hiring in the second half of this year will slow to its softest since 2012-13. One early warning sign: Car sales in China are reeling from a historic slump.
Barely finished cleaning up from their last recessions, central banks are swinging back toward rescue mode. Having cut rates a week ago for the first time since 2008, the Federal Reserve is on course to do so again next month and investors price in further action by year-end. That’s despite Chairman Jerome Powell’s signal that he’s undertaking more of a mid-cycle adjustment than a pronounced easing cycle.
Trump on Wednesday upbraided the Fed again. “They must Cut Rates bigger and faster, and stop their ridiculous quantitative tightening NOW,” the U.S. president tweeted. “Incompetence is a terrible thing to watch, especially when things could be taken care of sooo easily.”
But this time around central bankers may not be powerful enough given rates are already low and further action may not offset the fallout from the trade troubles. Investors surveyed recently by Bank of America Corp. identified monetary policy impotency as their biggest concern.
“We are using interest rates to fix problems that they cannot solve,” said Patrick Bennett, head of macro strategy for Asia at Canadian Imperial Bank of Commerce in Hong Kong.
An added complication is the U.S. Treasury’s decision this week to label China a currency manipulator after China allowed the yuan to weaken past 7 against the dollar for the first time since 2008.