LONDON (Reuters) – The global economic outlook is deteriorating, with a broad range of asset prices and real-time economic indicators pointing to either a slowdown in growth or an outright recession occurring in 2019.
South Korea’s KOSPI-100 equity index has now fallen by almost 19 percent over the last year, the fastest rate of decline since the financial crisis of 2008/09, in a warning sign for investors and commodity traders.
The KOSPI-100 has correlated closely with the growth in international trade, given the South Korean economy’s strong export orientation, so the sharp decline suggests trade growth will slow sharply in the months ahead.
Germany’s DAX index, another share market heavily exposed to international trade, has also fallen by more than 14 percent over the last year, its worst performance since early 2016, and before that 2011.
Even in the United States, which is much more closed to international trade and has reported the strongest economy and stock market in 2017/18, there are signs the bull run is running out of momentum.
The broad S&P 500 equity index is up just 7 percent compared with the end of October 2017, the smallest year-on-year increase for almost two years, and far below its peak of 24 percent at the start of 2018.
The stimulus of corporate tax reductions which went into effect at the start of the year is beginning to fade and more U.S. businesses are struggling with a rising exchange rate, tariffs and slower revenue growth.
Revenue growth at U.S. corporations is slowing, with a significant number of S&P500 firms reporting disappointing sales in the third quarter (“Bull market’s latest hurdle: slowing sales growth”, WSJ, Oct. 21).
The U.S. Treasury yield curve remains close to inversion, with rates on 10-year paper just 26 basis points above 2-year notes, a signal that has often preceded a slowdown in growth or recession in the past.
The U.S. dollar remains close to its highest value for a quarter of a century against a trade-weighted basket of the currencies of U.S. trading partners.
The combination of a rising interest rates, a flattening yield curve, falling share prices and a strengthening dollar represents a significant tightening of financial conditions, not just in the United States but around the world.
The OECD’s composite leading indicator has fallen to its lowest in almost two years and is at a level that is consistent with a slowdown in economic momentum.
Rising oil prices, especially for consuming countries outside the United States, have added to the pressure on many emerging markets.
U.S. freight movements also indicate the rate of growth is easing after accelerating consistently for two years between the middle of 2016 and mid-2018.
U.S. rail freight movements are still rising but a slightly slower rate than in the first half of the year. Truck tonnage growth has seen an even sharper slowdown since peaking in June.
Total freight movements by road, rail, barge, pipeline and air were about 4.5 percent higher in August than at the same point a year ago, down from a peak of more than 8 percent in June.
On their own, any of these financial and real indicators could be dismissed as due to idiosyncratic factors, but in combination, when they all point in the same direction, they point to a loss of momentum in the global economy.
The latest Reuters’ quarterly poll of more than 500 economists found the global outlook for 2019 had worsened for the first time (“Global growth outlook for 2019 dims for the first time”, Reuters, Oct. 22).
At this point it is impossible to know whether the slowdown will take the form of a moderation in the rate of growth (a “growth recession”) or an actual decline in activity (an “outright recession”).
Deep recessions such as the one which accompanied the financial crisis in 2008/09 are uncommon and unlikely to be repeated this time around.
Most recessions since 1945 have involved either a mild slowdown in the rate of growth or a very small and short-lived decline in economic activity.
But most indicators now point to significantly slower growth next year than in 2017/18.