Global Economic Slowdown Unlikely To Change Course With July Rate Cut

Jul. 30, 2019 10:48 AM ET
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Summary

  • Trade tensions and concerns around growth potential are unlikely to subside anytime soon.
  • The slowdown in economic growth in the second quarter of 2019 was significant.
  • The historical parallels of similar slowdowns as well as incoming data both point to a prolonged slowdown that is unlikely to reverse course with a 25 bps rate cut.

There are essentially two factors currently weighing on global economic growth at the moment. There is the secular narrative, and this has been a headwind for growth for some time, and there is the relatively recent political headwind that is unlikely to change course anytime soon.

Secular

Aging populations and decreased fertility rates:

Source: UN

The number of people worldwide aged 60 years or over is expected increase to 2 billion by 2050, outnumbering the number of children (0-14 years) for the first time in human history. Rapidly aging populations result in shrinking labor force growth rates, which is a headwind to economic growth.

Global debt to GDP at historically high levels:

Source: McKinsey

Global debt to GDP levels were at elevated levels back in 2007 and a decade of monetary easing since then has resulted in significant increases in leverage ratios in the vast majority of countries, which also serves as a headwind for future economic growth.

Populism and Barriers to Trade

The U.S. has been escalating tariffs against China with the intention of driving Chinese reforms around intellectual property theft and the state subsidization of private enterprise. This has had a significant impact on supply chains linking the U.S. and China, and in our interconnected global economy, has also had impacts far beyond the borders of the U.S. and China:Source: TradingEconomics

European Manufacturing is flashing red (readings <50 imply contraction) and we're seeing a similar downwards in the manufacturing PMIs of the U.S. and China since the beginning of 2018 as well. With producer sentiment in free-fall in response to rising trade tensions, the question becomes how close are we to a resolution of the current trade disputes, such that manufacturing sentiment can recover. Given how far apart the two sides are on many of the major sticking points around a potential trade deal, it would seem

This article was written by

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I am passionate about macroeconomics and financial markets. I focus on economic growth and inflation, and my view of those two variables drives my investment strategy.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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