The world is slowing and EU is just as vulnerable as Britain
The world economy has suddenly slowed. This was foretold months in advance by the sharpest deterioration in the global money supply since the onset of the Great Recession. Global conditions are a big part of why the British economy shuddered to a near halt in the first quarter. The “Beast from the East” accounts for much of the rest.
The crash in growth to 0.1pc was certainly awful but it tells us little about the specific impact of Brexit, and even less about the underlying pathologies of the British economy.
The eurozone is also in some trouble. Industrial output has contracted for three months in a row. Citigroup’s economic surprise index for the region has plummeted from peak euphoria in December to levels last seen at the depths of the EMU banking crisis in 2011.
Monetarists say Europe is feeling the delayed effects of central bank tightening. The flow of fresh stimulus from quantitative easing is tapering away. The pace of bond purchases has dropped from €80bn (£70bn) to €30bn a month, and is expected to stop altogether by the end of the year.
This has reduced the growth rate of the eurozone’s broad M3 money supply to 2pc (three-month annualised). It is close to stall speed. Tim Congdon from the Institute of International Monetary Research says Europe faces a “monetary cliff ” when QE ends. It risks sliding back into the quagmire of 2011-14.
A parallel saga is under way in the US where “quantitative tightening” is in progress and the Federal Reserve is draining dollar liquidity at an accelerating rate. By September the Fed will be shrinking its balance sheet by $50bn a month. It is also raising rates at a brisk pace, lifting the worldwide cost of corporate capital.
Three-month Libor – used to price $9 trillion of US and global contracts – has risen by 60 basis points since early February to a nine-year high of 2.36pc. This is causing international tremors. Hong Kong has had to intervene five times in the exchange markets and is squeezing its leveraged financial system. Local Hibor rates are soaring. This will soon show who has been swimming naked in the frothy waters of the Pacific Rim.
In China, proxy indicators suggest that the true rate of economic growth dropped to 4.5pc at the start of the year as pollution controls combined with the delayed effects of tighter credit. It is why the People’s Bank cut the reserve requirement ratio for lenders by 100 basis points two weeks ago and signalled more to come.
The Dutch CPB index of world trade contracted by 0.4pc in February, the most recent month available. Data on US road freight volume is more recent and it is hardly glorious. The American Trucking Association says its gauge of tonnage fell 0.8pc in February and a further 1.1pc in March.
Contrary to general belief, commodity prices have been falling this year. The broad IHS index of raw materials – including items such as rubber or fibres that are free from the distorting effects of financial speculation – peaked in early January and has been sliding fitfully ever since. Oil is rising but not because of any acceleration in world demand.
Brent crude prices have spiked to a three-year high near $75 a barrel
‘Let us hope the first quarter turns out to be an air pocket. If not, Britain will face its Brexit ordeal in earnest’
because production cuts by Opec and Russia have at last cleared the glut. This leaves the global economy more vulnerable to supply shocks, and there are plenty of geostrategic storms coming into view.
The implosion of the Maduro regime in Venezuela is causing a collapse in oil output.
If Donald Trump reimposes sanctions on Iran in May – now highly likely – it might reduce global supply by 700,000 barrels a day within a year.
The effect of rising energy costs on a slowing global economy is toxic. Consumers in the US, Europe, China and India enjoyed a $1.6 trillion annual windfall when prices slumped in 2015 and 2016. This year they have been hit with an $800bn headwind. Should we worry about a possible British recession? Yes, we should. The growth rate of real M1 money (three-month) has collapsed.
The Bank of England’s Governor, Mark Carney, is right to back away from a rate rise in May.
We do not yet have the full firstquarter readings from the eurozone. French GDP growth slid from 0.7pc to 0.3pc. The Bundesbank says only that the German economy has slowed “noticeably”. The Macroeconomic Policy Institute (IMK) in Düsseldorf says its recession risk indicator has jumped to 32.4pc, higher than in March 2008.
My guess is that Europe will muddle through in better shape than Britain, winning the beauty contest. Those who want to turn this into a larger indictment of Brexit will have a field day. But note a caveat: the UK is still imposing austerity. Europe is adding fiscal stimulus.
The IMF estimates that Britain is tightening budget policy this year by 0.3pc of GDP, based on the “cyclically adjusted primary balance”. The eurozone is loosening by 0.3pc. “It could go some way to explain the UK/ euro area growth differences,” said David Owen from Jefferies.
Such subtleties will be lost in the political shouting match over Brexit, just as they were last year when the eurozone’s growth rate was flattered by the closure of its post-depression “output gap”.
This year may be treacherous. “It has been an extremely long cycle and everybody is asking when the next crisis is coming,” said Gareth Williams, head of credit conditions for Standard & Poor’s.
“We are at an extremely difficult stage in the transition. Central banks have been absorbing a lot of debt supply and nobody knows what will happen when they are not there any more,” he said.
Let us hope the first quarter turns out to be an “air pocket”, with global growth picking up again over the rest of the year as Trump’s tax cuts feed through into the US economy.
If not, Britain will start to face its Brexit ordeal in earnest. And Europe will start to pay the existential price of its own great failure: neglecting to fortify monetary union with the fiscal machinery needed to survive the next downturn. Pick your drama.