The ongoing year-long trade dispute first dented sentiment, then international trade. Industrial production and investment have now also been affected, while the first cracks in the services sector are starting to appear. In particular, the employment component of the Markit Economics’ World PMI-Services dropped abruptly in September to 50.4 (from 51.2). Although it remains above the 50 threshold that separates expansion from contraction, signs of contagion from manufacturing are difficult to ignore.
In our analysis we compare the similarities and differences between today and the previous global economic slowdown in 2015-16 in order to identify what factors allowed us to avoid a recession then and if these can be reproduced to the same effect today. Indeed, the resemblance between the two periods in services sentiment is quite striking. After touching a floor, sentiment improved and a recession was ultimately avoided. So the question is, would a similar rebound be possible today?
In 2015-2016, China was the epicentre of the shock. After the Yuan depreciated, financial market volatility spiked in August 2015 and triggered an increase in global risk aversion, weakening currencies for many emerging markets. The crisis was resolved with a resolute response from the Chinese authorities through monetary, fiscal and capital account measures. Global sentiment bounced back, a recession was avoided and economic growth was underpinned by low oil prices.
Changing growth dynamics
Today’s growth dynamics are different. In 2015, there was a single epicentre of concern: China. Worries about a Chinese economic slowdown triggered a capital flight from China, which progressively impacted neighbouring countries and later advanced economies. This time, the shock is global in nature. All evidence points to synchronised global shocks that are hurting the global economy. First, sentiment was hurt, followed by international trade, and then industrial production and investment are progressively affected. Now, even the more immune services sector is showing some cracks.
Therefore, what is required to offset today’s global economic headwinds is a global response that includes fiscal stimulus as well as an end to trade tensions in order to avoid further deterioration. In the meantime, the next quarters will likely reflect further economic weakness.
This time, China’s efforts alone cannot keep a global economic recession at bay. The world’s two largest economies must conclude their trade war in order to alleviate the uncertainty that prevents business investment and restore wind to the global trade sails. With central banks running out of room to manoeuvre in prolonging the current cycle, governments must now roll out fiscal stimulus in a synchronised effort to prevent a global recession this time around.