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Escalating trade tensions crimp corporate investment

Business optimism around the world waned last month, according the bellwether JP Morgan Global Manufacturing purchasing managers’ index.

Based on data from JP Morgan and IHS Markit, the PMI reading from June, which slipped below the neutral level of 50 in May to 49.8 (from 50.4 in April) slipped further to 49.4 in June. This marked its lowest fell lowest level since October 2012 as well as consecutive  sub-50.0 readings for the first time since H2 of 2012.

Global PMI data is compiled from individual PMI data for 30 countries, of which 18 showed contraction last month including China, Japan, Germany, Taiwan, South Korea, Italy, Russia and the UK. The declines were offset by the US, India, Brazil, and Australia, which all remained above the neutral 50 level, signalling growth. The eurozone continued to show a contraction with the PMI for June falling to 47.6 from 47.7 in May, despite Greece, France and the Netherlands being in the expansion zone.

The performance of the global manufacturing sector also continued to weaken at the end of Q2 2019. Production fell for the first time since October 2012, as new orders contracted at the fastest pace in almost seven years, according to JP Morgan and IHS Markit.

Although the global PMI for consumer goods fared better, it also dropped to 52 in June from 53 in March. Over the period US president Donald Trump imposed additional tariffs on China in May, increasing uncertainty in the business sector globally.

Consumers to the rescue

The data suggests a slowdown in corporate investment as a result of disrupted supply chains arising from the trade war. This has, in turn, resulted in a significant decline in the growth momentum of the global economy that may not be easy to arrest.

The overall picture is that corporates are not investing enough to sustain global economic growth, while global consumer spending has weakened but is still strong enough to prevent a recession in H2 of 2019.

“The good news is global consumers are still in reasonably good shape,” says Tai Hui, chief market strategist for Asia Pacific at JP Morgan Asset Management. “But typically if you look at economic cycles, corporate investments tend to be the more volatile component. So that is a real threat and certainly a real challenge to global growth as we get through the second half of 2019,”

Expectation is growing that the US Federal Reserve and other central banks may cut interest rates in H2 2019 in order to arrest a slowdown in the global economy, although more radical action could prove necessary if trade tensions between the US and China are not alleviated.

“Interest rate cuts would provide investors some assurance in these financial conditions,” says Aninda Mitra, vice-president and senior sovereign analyst of BNY Mellon Investment Management. “But there has to be additional policy response be it a fiscal channel, be it through structural reform channel, be it through countries to rescue the supply chain and so on. But those responses will take more time.

“Recreating the supply chain will take a longer time, but in the meantime the process of easing financial conditions has to begin. Cuts are a necessary but insufficient condition for turning around the global picture.”

The World Bank Group has downgraded projected global real GDP growth for 2019 to 2.6%, down by 0.3% percentage points from its previous forecast in January. Currently it expects a slight increase to 2.7% in 2020.

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