by Michael Roberts
Today’s news that the German economy, the powerhouse of Europe,
had narrowly avoided a ‘technical recession’ in the second half of 2018
is another red light flashing for the world economy. In 2018, German
real GDP growth was 1.5% down from 2.2% in 2017. This was the weakest
growth rate in five years And in the second half of last year, the
growth was slowing fast, up only 1.1% yoy compared to 2% in Q2 2018. It
fell 0.2% in Q2 over Q1 and rose just 0.3% in Q3.
As for Germany’s industrial sector, that clearly is in recession.
Industrial production in Germany decreased 4.7% in November of 2018 over
the same month in the previous year.
German companies have been hit by poorer sales from a world economic
slowdown and political uncertainty surrounding Brexit and the trade war
between the US and China. The UK, US and China are all among German
makers’ biggest markets.
The collapse is particularly noticeable in the very important auto
sector, where the global slowdown, sharp drops in demand and the
restrictions on diesel car emissions have destroyed the auto sector
globally. Passenger vehicle sales in China, the world’s largest car
market, fell for the first time last year since the early 1990s, down
4.1%. Sales in December were down 15.8 per cent from the same month
last year, the steepest monthly fall in more than six years and the
sixth consecutive month of declining sales.
Germany has dragged down industrial production in the Euro Area. It
fell 3.3% year-on-year in November. It is the first annual fall in
industrial output since January of 2017 and the biggest since November
of 2012.
Indeed, the German experience is being followed in varying degrees
across the globe, at least in the major economies. The global PMI, the
key business activity indicator, shows a slowing down. The level of
activity is still above 50 (and therefore indicates expansion) and is
not yet down to the recession depths of 2012 or 2016, but it is on its
way.
And the global PMI for ‘new orders’ shows a slowdown in both manufacturing and services globally.
And among the so-called ‘emerging economies’, emergence is being
replaced by submergence. Real GDP in Latin America as a whole is
contracting on annualised basis, according to investment bank JP Morgan.
Among the so-called BRICS (the major emerging economies), China’s
industrial production slowed in November to 5.4% yoy, the smallest rate
since the mini-recession of early 2016. Industrial production in Brazil
contracted 0.9% in November, while Russia’s industrial production slowed
to 2.4% yoy from 3.7% in October. Russian manufacturing output stopped
growing altogether. Manufacturing output growth in South Africa slowed
to 1.6% November from 2.8% in October. Even the fastest-growing major
economy in the world, India, took a hit. India’s industrial production
growth slowed sharply to 0.5% yoy in November, the smallest gain since
June 2017 and manufacturing output actually fell 0.4%.
My post outlining an economic forecast in 2019 offered several different short-term indicators for the direction of the world economy.
The first was credit and the so-called ‘inverted yield curve’ ie the
difference in the interest rate received for buying 10yr US government
bonds and 2yr government bonds. In a ‘normal’ situation, the interest
rate earned for holding a longer term bond will be higher because the
bond purchaser cannot get the bond back for ten years and there is
higher risk from changes in inflation or default compared to a bond held
over two years. But on some rare occasions, the interest rate on
two-year bonds can go higher than on ten-year ones. This is because the
interest rate is being driven up by hikes in the central bank rate
and/or because investors are fearful of a recession, so they want to
hold as much government paper as possible. They sell their stocks and
buy bonds. Every time the yield curve inverts, an economic recession in
the US at least follows within a year or so.
Well, investors have been selling stocks and the stock market has
dived. But we still don’t have an inverted yield curve yet, partly
because the Federal Reserve appears to have decided not to raise its
policy rate so quickly any more – precisely because it does not want to
provoke a recession when the world is slowing down.
The second indicator is the price of copper. As copper enters much
of the components of industrial output, its price can be a good
short-term gauge of the strength of economic activity globally. Well,
the copper price is down from its peak in 2017 but still not at levels
seen in the mini-recession of early 2016.
The most important indicator in my view is the movement of profits
for the capitalist sector of the major economies. This drives
investment and employment and thus incomes and spending. But it is not
possible to get such a high frequency measure – indeed most profit
reports are quarterly at best. Goldman Sachs, the investment bankers
have made some forecasts, however for this year. Their economists
conclude that “In terms of profits, we do expect a sharp slowdown. In
every region we expect profit growth to be below the current bottom-up
consensus, and to be around 5% in 2019. In the case of the US, in
particular, this would represent a very sharp slowdown from the 22% EPS
growth expected for 2018.” They ‘benchmark’ this profit forecast against their measure of ‘growth momentum’ and find that it “implies a further sharp deterioration in growth.” But not yet a recession forecast.
These indicators all suggest a sharp slowdown in global growth,
particularly in manufacturing and industry. The US yield curve is close
to inversion but not yet inverted; the copper price is down but not yet
at lows; and global profits growth has slowed but is not yet falling.
So the amber light for a global slump in 2019 has still not turned red –
yet.
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