Beware presidents bearing tweets
10 July 2018
After an unexpectedly soft start to the year, data released over the past month suggest that global growth momentum picked up modestly in Q2. The global manufacturing PMI has continued to gradually decline through the spring and into the early summer. But the global services PMI, which represents a larger share of global economic activity, has staged a recovery and is not far from a multi-year high, led by the advanced economies. Meanwhile, our Nowcasts, which take into account a broader set of hard and soft indicators, imply that underlying global growth has stabilised a little above trend in recent months, albeit at a more subdued pace than in H2 2017. The US is economy will probably show the sharpest improvement in recorded growth in Q2, with tracking estimates currently above 4% annualised. The UK should also see a significant pick-up in growth as activity has recovered well from the weather-related weakness of Q1. We also expect Japanese growth to move back into positive territory, though growth in the Eurozone and emerging markets in the aggregate is likely to be little changed.
These healthy economic trends ought to have allayed investors’ fears about the outlook for the global economy. Yet global equity prices are still struggling to gain traction and remain below their January peak in USD terms. So what gives? Our analysis suggests that much of the blame is attributable to rising global trade tensions. Since the beginning of the year, the Trump administration has announced new duties on washing machines, solar panels, steel, aluminium, and more recently a 25% tariff on the export of 818 Chinese products, covering everything from aircraft, to chicken incubators and industrial magnets. More is likely to come, with investors especially wary of the results of the US Commerce Department’s Section 232 investigation into auto parts imports. In fact, on days that the president has tweeted about trade policy or China so far this year, the S&P 500 has declined a cumulative 6% (see Chart 1). As long as US trade measures do not spark an all-out trade war, we remain confident that the global economy will continue to expand at a healthy pace over the coming quarters. But it will be hard for investors to fully pay up for that growth until the risk of such a war is taken off the table.