US booms as growth flounders elsewhere
THIS WEEK’S BALI SUMMIT MAY SEE IMF REVISING 2019 FORECASTS
The US boom won’t be enough to stop the rest of the world economy from slowing down. Finance ministers and central bankers head to Indonesia this week for the International Monetary Fund’s (IMF) annual meeting, with the lender signalling it will cut its global growth forecasts for the first time in two years after the best upswing since 2011.
That’s despite data from the world’s largest economy showing that the unemployment rate fell to a 48-year low, justifying Federal Reserve Chairman Jerome Powell’s description of it is as enjoying a “particularly bright moment”.
Activity elsewhere is weakening, in part because of higher Federal Reserve interest rates, and US President Donald Trump’s trade war with China. Global manufacturing is growing at the weakest pace in almost two years and exports shrank last month for the first time since 2016.
“The US may be booming but the global economy is starting to slow,” said Janet Henry, chief economist at HSBC Holdings. But even the US may not be immune. Recent data showed the trade skirmish shaping up as a clear drag on growth last quarter.
Another wild card is the return of inflation, with oil close to $100 a barrel for the first time since 2014 and wages picking up. That would be another price boost on top of any tariff impact, hitting consumer pockets and forcing central banks to act faster.
“Investors appear unprepared for a rise in inflation,” Morgan Stanley strategists led by Hans Redeker wrote in a report. “Multiple factors suggest that inflationary pressures are rising.”
The trade war is raising the biggest red flag. In the past few weeks alone, Panasonic Corp, Ford Motor Co. and BP Plc have all highlighted the dangers of the escalating tensions, and those worries are starting to filter through into the broader economy.
Emerging market stresses
Emerging market stresses from Argentina to Turkey, political uncertainty in the UK and Italy, and rising oil prices are among the other threats. While there’s no sense of growth coming to a halt, the crystallisation of risks means the synchronised expansion of last year is a fading memory.
HSBC lopped its forecasts for 2019 world growth, mainly prompted by a downgrade for emerging nations struggling with the rising dollar. It lifted its US growth prediction for this year to 3 per cent and for next year to 2.5 per cent on the back of Trump’s tax cuts.
The confluence of factors may be enough for the IMF to trim its maintained forecasts this year for the world economy to expand 3.9 per cent in 2018 and 2019. The fund will update its World Economic Outlook on October 9.
The split between the US and elsewhere is evident in financial markets. The dollar has outperformed all major peers in 2018, while the S&P 500 index has climbed more than 8 per cent, versus a drop of 7 per cent for a global index that excludes the US. Meanwhile, Treasury 10-year notes yield the most relative to Germany’s bunds since at least 1989.