Concerns and uncertainties on
world economic activity having been gathering pace since the fall. The swift decline
in world trade reflects this change in pace, moving into the red with a
contraction of 0.4% in January vs. yoy growth of 4% in September 2018. This turnaround has triggered
concern from the OECD and the ECB, prompting them to slice back growth
projections for the euro area in particular.
The very heart of this economic
question is whether this shock is permanent and persistent, and in this respect,
there are two interrelated questions worth noting, as well as another third
The first point is the political
explanation for this downturn. Trade tariffs applied by the White House have
shifted the balance of trade between the US and China, leading to a swift slowdown
in trade in Asia since the start of the fall and acting as the main
contributing factor behind the decline in world trade as a whole. By targeting
China directly, Donald Trump is actually damaging the entire region.
The other aspect is the
uncertainty triggered by the White House’s political choices, as doubts on
trade following border tariffs are further heightened by the threat of fresh
trade moves. A case in point is the German automotive sector, which could be
hampered by a border tax of 25%, as the US threatens to impose tariffs on $11bn
in European exports to the US in retaliation for European subsidies to Airbus. The
WTO will have the final say, but there is also a further threat as Boeing is
now struggling with recent problems on its 737 Max.
Look at this map. Who then can expect a trade deal between China and the USl The real question is about techno leadership? Huawei has a step ahead of the US.
The Chinese company already has deep discussions with many countries throughout the world. From Asia to Europe, Africa and Latin America the Chinese web is already impressive. On the other side, the US has forbidden purchases of infrastructures coming from Huawei. Australia, New Zélande, Japan and Taiwan follow the same rule. But it is a minority.
Recently, the US has generate pressure on Germany to forbid the German to buy Huawei products in the renewal of their mobile network. Germany has not changed its mind and has allowed Huawei to compete.
The balance of strength at the global level may change rapidly at the expense of the US.
How to expect an agreement that would validate the dominance of one over the other? From China to the US?
Tensions between China and the US are about technological leadership.The Chinese, whose technological catch-up has been rapid in recent decades, is now rather ahead of 5G and Artificial Intelligence.The US does not accept, rightly, this change of equilibrium. The standoff will continue and I can not imagine a quick trade agreement because it would assume that one of the two countries accepts the leadership of the other.This seems totally illusory and that is why the global environment will remain volatile. The US is pressuring its allies to limit Chinese influence.To be convinced, read this article of the Wall Street Journal published this afternoon (March 11).It indicates the pressure of the Americans on the Germans in the adoption of a Chinese 5G technology for the renewal of their mobile network.
The article “Drop Huawei or See Intelligence Sharing Pared Back, U.S. Tells Germany” is available here Here is the first paragraph “BERLIN—The Trump administration has told the German government it would limit the intelligence it shares with German security agencies if Berlin allows Huawei Technologies Co. to build Germany’s next-generation mobile-internet infrastructure.”….
economic outlook in developed markets is the result of a shock on economic activity
due to a sharp slowdown in world trade, combined with insufficient productivity
growth to trigger a swift recovery in economic activity. The risk of a
long-lasting shock hampering both activity and the labor market is particularly
high, as economic policy has little leeway to cushion these shocks and spread
the cost out over time.
The decline in productivity gains
is a real source of concern, especially for developed economies. In short, productivity
is the surplus created by the production process, so when we talk about the
production process, one plus one makes a little bit more than two: this “little
bit more” equates to productivity gains. Depending on the time period and the
efficiency of the production set-up, this “little bit more” can vary in size. In
the past, productivity gains were vast, with growth of 5.8% per year in France
on average in the 1960s, and this led to a downtrend in working time, an
increase in wages and the implementation of an effective social security system
(productivity gains = increase in production per hour worked in volume terms). The
higher this surplus, the greater the production system’s leeway to redistribute
these gains to all citizens.
Due to the very nature of the
process, these gains drive self-sustaining momentum that helps cushion shocks
and swiftly sets an economy back on the track to growth and jobs. The higher
the gains, the more readily the economy can recover quickly and on a broad
The current period since the crisis in 2008 has been
characterized by a clear slowdown in production per hour worked across all
developed countries. This is
shown in the table below, which outlines average annual productivity growth
across three time periods: an extended period between 1990 and 2007, the period
since the US recovery in 2009 and the phase since the recovery in Europe in 2013.
World trade is slowing down sharply. In the last quarter of 2018 compared to the last quarter of 2017, trade is now up only 1.5% against 3.9% in October. The adjustment is not finished if we follow the Markit indicator of export orders in the USA, Japan and the Eurozone.
Asia is the region that contributes the most to this slowdown. Its 3-month contribution to global import growth was at + 4.8% in September and dropped to -5.3% in December. This persistent shock on trade is the result of the choices made in the White House. The brutality of the movement explains the change in outlook on activity since last summer but also the Fed’s new view on its monetary policy.
World trade, seen from developed countries, is now at risk. The average export orders (Markit) of the USA, Japan and Euro zone fall to 48.6. The braking action is terrible. If China slows further, the global economy will be stifled.