Trade war: ‘There’s path through this’
Consumer spending key says economist, and it’s holding up
Don’t give in to the economic gloom just yet. While the risk of a serious downturn is real, a recession is still far from certain, says S&P Global, chief economist Paul Gruenwald.
“There’s a path through this where US growth stays close to potential,” says New York based Gruenwald, who was visiting New Zealand this week.
“The US-China trade war is certainly the number one risk to the outlook. Our research indicates that’s dampening investment spending and growth.”
But the data shows weakness is concentrated in manufacturing and trade.
“The main part of most economies, which is consumer spending, is holding up pretty well,” Gruenwald said.
The US economy was still trending at about 2 per cent GDP growth and China was still trending at about 6 per cent.
Manufacturing-based economies were currently most vulnerable, he said.
Germany — which has seen growth slip in to negative territory in the past quarter — was a good example
of that. “But the downturn, for us, remains a risk scenario — it’s not our base line.”
Both China and the US were now starting to feel some effects of the protracted trade dispute and increasing tariffs.
But if you looked at what really drives growth in both countries it was consumer led, he said.
In the US consumer spending accounted for about 70 per cent of GDP growth. And even in China the rebalancing of the economy over the past decade had seen much more emphasis on the consumer, Gruenwald said. “Our research suggests [the loss of] a quarter point of growth for both countries due to the trade war, but since the drivers of growth in both economies are consumer spending and that’s holding up well, growth’s holding up well.”
Many commentators have warned that the inversion of the US Treasury yield curve, for two-year and 10-year bonds, points towards recession.
The yield curve did have a good track record as predictor, Gruenwald said. “I think it’s eight of the nine postwar recessions that have been predicted by the inversion of the yield curve,” he said.
“The caveat is that we have the central bank now in the bond market, holding a large amount of 10-year bonds and that’s pushing down yields.
“So, if we’re looking at the signal between the short end and the 10-year end, and the US Federal Reserve is buying a lot of 10-years, that’s going to distort the signal.
“I’m not saying the signal is wrong but that wasn’t true in the eight or nine earlier cases. This one is a bit different.”
Wall Street, and other global markets, have also been volatile this year, rattled by trade war risk.
But Gruenwald said the key with equities was the extent to which any falls flowed through and effected consumer confidence and spending.
“Equities are still pretty elevated, part of QE [quantitative easing} and low interest rates was to elevate asset prices. That’s a path to pay attention to,” he said.
“But really, the more important one for the US is employment, wage growth and consumer spending”.
Gruenwald, who has a PhD in economics from Columbia University and a bachelor’s degree in economics/mathematics from the University of Texas, is a former Asia Pacific chief economist for ANZ.
He now leads S&P Global Ratings’ research team in New York.