LONDON / HONG KONG (Reuters) – The decline in factory activity in Asia and Europe last month as a result of an escalating trade war between Washington and Beijing has led to fears of a global economic downturn and pressure on policymakers to provide further incentives.
An engineer is building a bracer for residential buildings in a metalworking factory in an industrial area in downtown Tokyo, Japan, March 22, 2016. REUTERS / Yuya Shino
Such growth indicators are likely to worsen over the coming months. Higher trade tariffs are affecting the economy global trade, affecting the business climate and consumer sentiment, leading to job losses and delays in investment decisions.
Some economists are predicting a global economic crisis and a renewed downward interest rate hike if trading tensions at a Group 20 summit in Osaka, Japan, in late June do not cease if Presidents Donald Trump and Xi Jinping could meet.
The trade war between the US and China, declining demand for cars, Brexit and general geopolitical uncertainty have affected manufacturing activity in the eurozone over the past month. In May, it shrank for a fourth month – and at a faster pace.
"The added shock of escalating trade tensions will not be good for world trade. In terms of monetary policy response, the race will go down almost everywhere, "said Aidan Yao, Senior Economist Emerging Markets at AXA Investment Managers.
The IHS Markit Manufacturing PMI for the euro-zone in May was 47.7 below April and barely above a six-year low in March.
In the UK, Brexit inventories dropped in early 2019 last month as new orders faded and economic growth slowed in the second quarter.
After an official indicator indicated a decline on Friday in China, Asia's economic heartbeat, the Caixin / IHS Markit Manufacturing PMI showed a modest expansion, giving investors short-term relief.
However, the outlook remained bleak as production slowed, factory prices faltered, and companies judged production least optimistic since the survey series began in April 2012.
Central banks in Australia and India are expected to cut interest rates week, with others around the world will follow suit in the coming weeks and months.
While US manufacturing is expected to grow steadily, economists predict that the global malaise will eventually return to the US economy. The Fed Funds' interest rate futures are now almost completely calculating a rate cut by September, with a probability of around 50% that they will be implemented by the end of July.
J.P.. Morgan now expects the US Federal Reserve to cut interest rates twice this year, a major change from its previous forecast that policy rates will remain on hold by the end of 2020.
In the meantime, Monday's poll shows that the eurozone economy is under pressure and is likely to upset European Central Bank policymakers, who have already raised the prospect of further support.
According to a Reuters poll last week, they are unlikely to raise interest rates before 2021. They said the bank's next political move would be to optimize their forward direction towards more adjustment.
The trade dispute between China and the United States escalated last month, when Trump raised tariffs on some Chinese imports from 10% to 25% and threatened to pay taxes on all Chinese goods.
If that happened, and China retaliates, "we could be in three quarters of a (global) recession," said Chetan Ahya, global business chief at Morgan Stanley.
Washington's new tariff threats against Mexico last week also contributed to global fears of recession, plunging stock markets around the world. US Treasury 10-year yields fell to 2.121%, the lowest point in September 2017.
The weekend saw renewed tensions between the US and China over trade, technology and security. China's Defense Minister Wei Fenghe warned the US not to meddle in security disputes over Taiwan and the South China Sea, while US Secretary of Defense Patrick Shanahan said Washington would no longer be tiptopping China's Asian behavior.
"We take that seriously. This means that the trade war has become not only a technology war, but also a broad based economic war. There will be more retaliation in China, especially for the technology sector, "said Iris Pang, economist for Greater China at ING.
Editorial by Simon Cameron-Moore and Gareth Jones