US strength unable to rescue global growth

The US boom will not be enough to stop the rest of the world economy from slowing.

Finance ministers and central bankers head to Indonesia this week for the International Monetary Fund’s 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 is despite data from the world’s largest economy on Friday showing that the jobless 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 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 in London.

The trade war is raising the biggest red flag. In the past few weeks alone Panasonic, Ford Motor and BP have all highlighted the dangers of the escalating tensions, and those worries are starting to filter into the broader economy.

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 is no sense of growth coming to a halt, the crystallisation of risks means the synchronised expansion of last year is a fading memory.

“Six months ago I pointed to clouds of risk on the horizon,” IMF Managing Director Christine Lagarde said last week. “Today, some of those risks have begun to materialise.”

HSBC last week 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 Mr Trump’s tax cuts.

In the meantime, Bank of America economists warned that China’s slowing growth will spill over into the rest of Asia next year and drag down the region’s growth rate.

“About 50 per cent of the value added that’s in Chinese exports to the US comes from the rest of Asia,” said Fabiana Fedeli, global head of fundamental equities at Robeco. “Clearly other countries will also be impacted if the trade war continued to escalate.”

The confluence of factors may be enough for the IMF to trim the forecasts it has maintained for the world economy to expand 3.9 per cent in 2018 and 2019. The fund will update its World Economic Outlook from Bali on Tuesday. It has not revised projections down for a year ahead since October 2016.

The split between the US and elsewhere is evident in financial markets. The dollar has outperformed all major peers this year, 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.

But even the US may not be immune. Recent data showed the trade skirmish shaping up as a clear drag on growth last quarter, prompting economists at JP Morgan Chase to pare their estimates for expansion.

About 50 per cent of the value added that’s in Chinese exports to the US comes from the rest of Asia FABIANA FEDELI Robeco head of fundamental equities