Signs of a global recession? Factory activity is slowing down

Analysts say the trade war is morphing into a tech and broad-based business war that could lead to a global recession.

Vendor in Beijing, China discussing US-China trade war
The US-China trade war is expected to hit global manufacturing hard, especially across Asia [Jason Lee/Reuters]

Factory activity slowed in the United States, Europe and Asia last month as an escalating trade war between China and the administration of US President Donald Trump raised fears of a global economic downturn and added new pressure on policymakers to step up support.

Growth indicators such as factory orders are likely to deteriorate further in coming months as higher trade tariffs take their toll on commerce and impact any positive business and consumer sentiment. This could lead to job losses and delays with investment decisions.

Some economists are predicting a global recession and a renewed race to the bottom with regards to interest rates if trade tensions aren’t eased at the upcoming Group of 20 Summit in Osaka, Japan. That summit – called the G20 – is scheduled to take place on June 28-29. Presidents Donald Trump and Xi Jinping could meet at the event.

The US-China trade war, declining car sales and Brexit, Britain’s proposed exit from the European Union, all took their toll on manufacturing activity in May.

Separate surveys by the Institute for Supply Management (ISM, a supply management association) and IHS Markit Ltd (a London-based information provider) showed that the US experienced a slowdown in manufacturing activity growth. The ISM’s reading of 52.1 was a surprise decline and the worst showing since October 2016. And the Purchasing Managers’ Index (PMI) from IHS Markit came in at its lowest level since the 2009 global financial crisis.

Data on construction from the US Commerce Department showed that spending showed no change in April, disappointing expectations. But this report also included upward revisions of data from the first quarter.

The data was largely collected before the escalation in trade tensions last week as Trump threatened new tariffs against Mexico. In the same week, Trump also decided to end preferential trade treatment for India.

Market prices appeared to reflect higher chances of a recession, and interest rate cuts by central banks including the US central bank (the Federal Reserve also known as the Fed). Based on short-term interest-rate futures, traders seemed to think the Fed could begin cutting rates as soon as next month. 

“There was a big change in the bond market,” Cornerstone Macro LLC researcher Roberto Perli said of these developments. “We don’t like to utter the word ‘recession’ lightly, but the bond market reaction on Friday in response to the Mexico tariff news was ominous.”

Earlier data showed manufacturing activity contracting at a faster pace in the eurozone during the month of May, and British manufacturers also saw their steepest downturn in almost three years. The economies of Japan, South Korea, Malaysia and Taiwan also all saw their manufacturing activity contract.

After an official gauge on Friday showed contraction in China, the Caixin/IHS Markit Manufacturing PMI showed modest expansion, offering investors some near-term relief.

However, the outlook remained grim as output growth slipped, factory prices stalled and businesses were the least optimistic on production since the survey series began in April 2012.

“The additional shock from the escalated trade tensions is not going to be good for global trade. In terms of the monetary policy response, almost everywhere the race is going to be to the downside,” said Aidan Yao, senior emerging markets economist at AXA Investment Managers.

Recession fears rising

The trade conflict between China and the US escalated last month when Trump raised tariffs on some Chinese imports to 25 percent from 10 percent and threatened levies on all Chinese goods.

If that were to happen – and if China were to retaliate – “we could end up in a (global) recession in three quarters”, said Chetan Ahya, global head of economics at Morgan Stanley.

Over the weekend, tensions flared up again between the US and China over trade, technology and security.

China’s defence minister Wei Fenghe issued a warning to the US not to meddle in security disputes over Taiwan and the South China Sea while acting US Defense Secretary Patrick Shanahan said Washington would no longer “tiptoe” around Chinese behaviour in Asia.

“We take this seriously. It means that the trade war has not only become a technology war but also a broad-based business war. There will be more retaliation actions from China, especially for the technology sector,” said Iris Pang, Greater China economist at ING.

Source: Reuters