Almost as soon as the world’s most eminent economic doomsayers began to warn about an impending slump, possibly as soon as 2020, policymakers were out of the blocks, racing to avert the worst effects.
The new year message from the International Monetary Fund (IMF) and a string of similarly gloomy commentators struck a chord, apparently within weeks of sounding the alarm that a global recession and possibly a credit crunch to rival 2008’s was on the way.
First to recognise the danger was the US Federal Reserve, which slammed the brakes on ever-tighter monetary policy. No more interest rate rises this year and possibly a review of the Fed’s sale of $3.7tn of assets, the unloading of which has done so much in the last 18 months to push up long-term interest rates charged by US banks and other lenders to commercial borrowers.
The People’s Bank of China brought similar cheer to investors after it loosened credit rules to allow small- and medium-sized businesses to borrow more freely. Almost overnight, an economy that was slowing dramatically and taking Germany, the US and much of Asia down with it, was back on the path to solid growth.
Politicians played their part. Donald Trump’s advisers spotted that his tariff war with China was as a serious drag on US trade.
Suddenly the aggressive bickering that governed trade talks last year between Trump and the Chinese premier, Xi Jinping, began to calm noticeably. In the past week, China’s chief trade negotiator, the vice-premier, Liu He, has said he would travel to the US to “work together to further implement the important consensus reached by the two state leaders”.
Beijing also pledged to cut taxes “on a larger scale” to boost business activity. Against a backdrop of disappointing industrial production figures and the first drop in car sales for almost three decades, the state council was following an almost Trumpian route to boosting growth. City analysts lapped up the news.
Since the Christmas break, the S&P 500, the broadest stock market index tracking major US corporations, has climbed back to 2610 from a 2018 low of 2416. Even the FTSE 100, battered by Brexit uncertainty, regained its composure and rose 300 points.
Other disputes featured on the IMF’s risk register. The row between Rome and Brussels over the Italian budget deficit and the danger it posed for the eurozone’s stuttering recovery was one. Likewise, there was the potential for a no-deal Brexit to spread chaos in financial markets.
After the Italian government found a way to compromise and the British parliament made clear it wasn’t prepared to countenance a no-deal Brexit, both these risks faded, or at least in the minds of investors.
However, the Cassandras are not giving up just yet. One reason is that the cost of the US/China trade war – in lost economic activity and falling levels of business confidence – has almost wiped out the benefits of Trump’s $1.2tn tax cuts. Going forward, the president’s recalibration of his rhetoric on trade with China has come too late and not gone far enough.
The US must also contend with a colossal policy mistake courtesy of the Fed, which raised interest rates four times in 2018 and has already offloaded hundreds of billions of dollars of assets. Its recent pause notwithstanding, the extra borrowing costs already imposed by the Fed will continue to hurt businesses and consumers. A third policy mistake is the shutdown currently gripping the federal government.
Meanwhile, in China, the ameliorating effects of Xi’s tax cuts and credit easing are likely to be short-lived, with knock-on effects in the US and Europe.
Diana Choyleva, a China expert at Enodo Economics, said last week that 2019 was shaping up to be a more challenging year than the last “as the trade war with the US morphs into a tech war and Beijing struggles to keep China’s rebalancing on track amid much weaker growth and mounting debt”.
The doomsayers at Fathom Consulting are sticking by their prediction of a global recession in 2020. At the consultancy TS Lombard, they see a move by JP Morgan as a canary signalling trouble ahead.
The US bank, which has played a major role in the lending bonanza of recent years, has increased the reserves it sets aside to cover loan losses. It has also tightened its lending criteria.
Could it be that America’s biggest bank has stopped dancing in the financial disco even while the music continues to play? That’s a big call when there is still money to be made from shovelling out cheap loans. Surely it means there is trouble ahead.