Growth in productivity gains has at least halved across the board. France, the US, Germany and Japan still have figures close to 1%, but trends in gains in Italy, Spain and the UK are now very low. The situation is particularly severe in Italy where output is barely more than the sum of its parts. The situation in the UK is also very worrying, as the country’s 0.4% points to an economy that is unable to recovery spontaneously, while the months ahead are set to see the country’s exit from the European Union to boot.
Recent GDP increases for many countries were the result of swift growth on the labor market, offsetting sluggish growth in productivity, yet this has often created greater job insecurity. This is the case in the UK for example.
This change in scale for productivity trends is also a reflection of economies’ ability to stage an independent recovery. High productivity growth acts as a regulating force in the event of a negative shock on economic, but this safety net is now much weaker, so a negative shock will have a greater and longer lasting effect.
World trade has been trending at a low clip since the summer, and thisexplains recent surprises on economic activity, which has been slowing at a faster pace than expected. Surveys show much slower growth in economic activity worldwide than had been expected last summer.
This trend is particularly strong in the manufacturing sector and we can see on the chart the pace of annual growth in world trade and the indicator for the world manufacturing sector (Markit survey), which hit a high in December 2017.
Over the last quarter, world trade rose only 1.5% yoy in volume terms vs. 3.9% over the third quarter of the year, although it is worth noting that US figures were unavailable due to the partial government shutdown from end-December to end-January, which makes for some uncertainty on December and hence 4Q figures. They show a trend of 0% in December for both exports and imports for technical reasons.
Looking in detail at this broad dent on world trade, Asia is the hardest hit, as trade with the rest of the world is dwindling, while within Asia, China is the most affected.
This shock on world trade is very probably a result of the US President’s moves that very specifically target China’s external trade.
Charts in the appendix show the pace at which Asian trade has decreased since its high in September. The surprise on the economic situation originates here, from this sharp and swift downturn in trade in Asia.
The key point to remember here is that a shock in one country can affect another country due to the way world trade works, as all countries are links in the same value chain. Trade disputes between China and the US hinder trade between the two countries, but this tension also affects trends in Germany, as part of the country’s exports depend on China and/or the US as products manufactured in those markets are then included in goods produced in Germany.
The shock on world trade already hampers western economies due to their restricted response capabilities, and this is where weak productivity gains are damaging, making for a double whammy that now drags down industrialized countries.
If tension between China and the US continues, the impact on world trade could increase, and the shock could then be negative and long-lasting. This would be bad news for both economic activity and jobs, unless economic policy smooths out the effects of these adjustments over time. This is precisely the role of economic policy – cushioning the impact of adjustments in the short term by spreading out the cost over time.
Yet the chances of economic policy acting as an instrument to adapt to the current situation are slim at this stage. Monetary policy is already very accommodative in most places, and in late January, the Fed decided to change course. It does not want to be hindered by commitments either on Fed funds rates or its balance sheet reduction program, but rather it seeks to maintain the wherewithal to address shocks that affect the global economy, and not just the domestic economy.
Fiscal policies do not seem very effective. The fiscal shock in the US dates back to 2018 and the budget balance does not make for much leeway, with figures set to come out at 4-5% of GDP in 2019 (source CBO). Meanwhile in Europe, the European Commission is willing to make some compromises, as seen in France and Italy, but it seems to want to stay in the driving seat and keep a grip on countries’ public debt.
This is why policies applied in Washington are a source of concern. There may be a severe and long-lasting economic shock, with no real leeway to tackle the consequences. Institutions and the social model will need to be reviewed to take on board this sluggish and sometimes volatile growth. Trump’s battle of wills with China is all about technology and who is the leader on this sector, yet it seems unlikely that we will get a quick answer to that question, as it would require one of the two countries agreeing to the terms set by the other.
This post is available in pdf format My Weekly Column – February 27