28 February 2019

The Economist: Why a global manufacturing slump is a recurring threat

[...]Global manufacturing activity has slowed (see chart). Economies that are especially reliant on trade, such as Germany and Japan, have suffered. Industrial production in the euro area has fallen over the past year. Both Japan and South Korea reported tumbling exports in January. The World Trade Organisation’s global trade outlook index has been falling for the past year. In February it dipped to its lowest level since 2010. America’s economy, which is less trade-dependent, has been relatively less harmed, though industrial production contracted in January. Why does the world’s manufacturing upswing appear to have flopped? [...]

there is more to the manufacturing swoon than Mr Trump’s trade war. The downturn bears a striking resemblance to the bout of economic trouble that began in 2015. Then, too, global manufacturing activity faltered. That was partly due to the bust that followed America’s extraordinary shale-oil boom. But China was also a big influence on exporters’ fortunes. Germany, for instance, has come to rely on China’s voracious appetite for its capital goods. [...]

China should not matter so much. Its tight capital controls ensure that its financial links with the rest of the world remain modest. It is not yet the engine of global demand in the way that America is: Mr Setser notes that China’s manufacturing imports for its own consumption are only about a third as large as America’s (though recent growth in Chinese imports has been an important driver of manufacturing demand for some countries, such as Germany). The problem is not so much that the headwinds from China are powerful, but that the rest of the world is so poorly prepared to lean against them. Interest rates remain extraordinarily low. If the global manufacturing malaise worsens, America will have precious little room to cut rates in response; Europe and Japan will have none. Fiscal policy could pick up the slack. Advanced economies could badly use a dose of deficit-financed public investment. But neither the euro area nor America seem keen to build.

Such policy debates may be inconsequential this time. In the last few weeks China has begun turning on the stimulus taps yet again, propping up sentiment there. The world’s manufacturing slowdown may well prove as fleeting as that of 2015. Both episodes show that the rich world has chosen to put itself at the mercy of the fiscal management of the Chinese Communist Party. That is a curious decision—but not an unprecedented one.

Full analysis on The Economist

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