Smith Upfront: Are we seeing the warning signs of a new financial crash?
Disappointing global growth, havoc with Donald Trump’s tariffs, tightened monetary policy by the Fed…that creaking sound you hear might be warning of a crash.
There are two ways of viewing most things. If you are an optimist then the recent disappointing performance of global stock markets – 2018 was the worst year since 2008 and the FTSE 100 fell by a hefty 12.5% – was merely the pause that refreshes and there is no need to worry. If you are inclined to fret about these things, however, you might be concerned that weak equity markets in a period that was supposed to be good for investors conveys a rather more worrying message.
Similarly, the unexpected and unprecedented warning from Apple in January that it would miss its profit and revenue forecasts, could be put down to either fears about the global economy (and in particular, China), which was Apple’s own take, or a reflection of the firm’s lack of innovation and overpriced products. Some say Apple has not been the same since the death of Steve Jobs in 2011, though that is perhaps a little unfair to his successors.
There is no great mystery about recent stock market wobbles. They have three related causes. The first was that the sunlit uplands envisaged for the world economy 12 months ago have not transpired. This was supposed to be the time when global growth returned to its pre-crisis norm of about 4% a year and world trade began to grow again as normal. It did not; global growth has been closer to 3.5% and trade has faltered.
Why it has done so owes a lot to the other two explanations. In his first year inside the White House we saw ‘good’ Donald Trump, cutting US personal and business taxes, which was music to the ears of corporate America. In his second year we saw ‘bad’ Trump – as in a protectionist president – starting with steel and aluminium tariffs and moving on to a fully-fledged trade war with China. Even Trump’s apparent drawing back at the G20 summit in Buenos Aires in December 2018, postponing a planned increase from 10% to 25% in another tranche of tariffs on China for 90 days, did not do anything for market sentiment; it continued to deteriorate.
The third element, the tightening of monetary policy by the Federal Reserve, provoked Trump’s ire. As well as raising interest rates four times during 2018, the Fed began the process of reversing quantitative easing (QE), to the tune of $50bn a month. Markets, perhaps, have relied too much on ultra-easy monetary policy and their weakness may be a reflection of Warren Buffett’s old adage, that it is only when the tide goes out that you see who is wearing swim-shorts. Other central banks are signalling that the party is over; the Bank of England would like to raise interest rates further and the European Central Bank has called a halt to its QE.
So is a crash on the way or are these just teething troubles? Many economists fear that the next downturn will soon be more than overdue, now that we are over a decade on from the last one. The counter-argument is that the weakness of the advanced-economy upturn since the global financial crisis means that the recovery can last for some time yet.
Even so, with each year that passes, the likelihood of the next recession will grow. While the consensus is that it will not happen this year, 2020 – Trump’s re-election year – is regarded as high risk. Markets anticipate these things and may be doing so again.
There are a couple of caveats. One is that the threats to the global recovery are largely in the hands of politicians. If the US president were to calm down the trade rhetoric and call off his dogs in the trade war with China, it would be good for global growth and financial markets would breathe a huge sigh of relief.
Similarly, central bankers are not oblivious to what is going on around them. They would not plough on regardless in the context of a sharply slowing world economy, let alone a recession. Already expectations about future rate rises by the Fed in America have been revised down. Many Fed-watchers do not expect any rate rises this year, after four in 2018. It is not out of the question that the debate will turn to rate cuts.
So there are warnings aplenty. The global recovery feels less secure than it did. It needs nurturing or market fears could be fully justified.
About The Author
David Smith, economics editor, The Sunday Times