All downhill from here?

In 2017, the seven largest economies—the US, China, Germany, Japan, France, the UK and India—grew together. The IMF hailed it as the “broadest synchronised global growth upsurge since 2010”. Add in the bonus of low inflation and volatility (bar February's spasm), and it’s easy to see why investors have been so sanguine. Unfortunately, it all may be over now.

“All the main global engines for growth look to have peaked, inclusive of the US, Europe, Japan and China”, writes Deutsche Bank strategist Alan Ruskin in his most recent note. Rather than a bang, we’re seeing something more like a whimper, or as he puts it, “a broadening out of some slowdown now evident in a majority of country PMIs turning weaker”.

Simon MacAdam of Capital Economics agrees: Markit’s global manufacturing PMI or purchasing managers’ index, which surveys companies for a feel of future economic output, slipped again in July from 53.0 to 52.7. That is not a precipitous drop by any means, and it’s worth remembering that a reading above 50 indicates an expansion. But according to MacAdam, it means global industrial production will slide further:

Most of the slowdown traces back to Asia. Along with South Korea, Vietnam and Taiwan, manufacturing PMIs for China, Japan and India fell between June and July.

On the other hand, the eurozone economies chugged along—their output remained virtually unchanged—as did the US. This regional divergence has been evident for several months. According to MacAdam:

Underlying all of this is the escalating trade war. It is not easy to quantify its full impact, says Ruskin, but one thing does stand out:

...much of Asia has exhibited a slowing with a regional uniformity more evident than elsewhere, [which] would suggest this is indeed the region that is most likely to pivot around the trade issue. In contrast, the region that looks most resilient is North America, where the US fiscal stimulus is pulling Canada along as well as maintaining relative strong US numbers, consistent with US growth well above 3%.

So it seems the US is better insulated from the whims of the Trump administration than its economic rivals. Well, for the moment anyway.

The fallout has also effected financial markets, as Gareth Leather and Krystal Tan (also of Capital Economics) show:

These declines are likely to bruise business and consumer confidence even further, adding another strain on growth. And if President Trump instigates a full-blown global trade war, “no part of the region would escape unscathed”, warns Leather and Tan. A tightening Fed further fans these flames.

For Ruskin, there’s still a glass-half-full argument to be made. The current global PMI of 52.7 is still higher than most of the post-crisis period, and the number of countries with PMIs below 50 (indicating a contraction) is falling:

The same is true for the number of countries with worsening PMIs month-to-month:

So the peak may be here, but the global economy still has some room to run—at least according to the IMF. Despite rising risks, they forecast 3.9 per cent growth this year and next.