MySay: Global economy at an inflection point?

This article first appeared in Forum, The Edge Malaysia Weekly, on November 4, 2019 - November 10, 2019.
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If you are confused about the present state of the global economy, you can be excused.

The fact of the matter is, everyone is confused — including many economists. After all, we are seeing so many important international political and economic developments taking place concurrently, dramatically increasing uncertainty around the world. No surprises then that business and investor sentiments have gone on a wild rollercoaster ride recently.

We also hear contrarian views about the global (and US) economy every other day. A case in point — an economist from a global credit rating agency who was recently interviewed by CNBC points out that there is an “awfully high” risk of a global recession in the next 12 to 18 months if the trade war continues and Brexit-related issues persist. He opines that even if the recession does not happen within this period, the global economy will be much weaker in the near term.

In contrast, another prominent economist, Robert Shiller, is looking at things from a totally different perspective. He believes that a recession may be years away. His opinion is largely based on what he describes as the “bullish Trump effect” in the market, which is inducing consumers to remain on the high street. He says this resilience in consumer spending will continue to support the US economy in the near term.

The truth is, there is no clarity as to where the economy is heading. The only surety now is that the global economy is losing its momentum. Global trade, semiconductor sales, capital spending, crude oil prices — you name it — have all been sliding in the past 6 to 12 months from their peaks. The only bright spot so far, as Shiller points out, is consumer spending. Consumers, especially in the US, are still relatively unfazed by prevailing global economic uncertainties. Indeed, their discretionary spending reflects none of those uncertainties at this juncture. This is similar to the situation in Malaysia, where consumers have been propelling the overall expansion and contributed over 90% to gross domestic product growth in the first half of the year.

But the question that businesses (and consumers) may be asking now is, how weak is the economy compared with past economic downturns? Is the current soft patch similar in magnitude to the one we saw in 2016, when global crude oil prices halved from their peak? Or are we likening the situation to the famous “cycling in the air” act of the Looney Tunes’ Wile E Coyote before he plunges into the valley? In other words, how does the present weakness stack up against the economic downcycles of, say, the dotcom bubble burst or the global financial crisis (GFC)?

To answer this, some statistics are worth looking at. In terms of global trade momentum, the following has been observed. As at June this year, we can see that eight months after hitting its peak in October last year, the global trade volume index, published by CPB Global Trade Monitor, fell by 3.5%. During the GFC downturn, the same index showed a 2.8% contraction, eight months after hitting the peak of the cycle in January 2008. During the dotcom crisis, however, the index fell by almost 5%, eight months after the peak of the cycle. Thus, from the trade perspective, the situation at this juncture is slightly more severe than during the GFC downturn. This is not surprising as the trade war has eroded global business sentiment and caused a significant deterioration in international trade activity.

At the same time, global manufacturing momentum is slipping at a faster pace than during the GFC downturn. This can be seen from the industry benchmark indicator, namely the US manufacturing Purchasing Managers’ Index, which slipped 16% by the 11th month following its peak in August last year. During the GFC, the same index fell by 9%. The present weakness almost matches the decline seen during the dotcom bubble burst, when the index dropped 17% over the course of 11 months following its peak.

A closer look at a specific segment of global trade — semiconductor sales — reveals an opposite picture. Global sales declined less in the current downturn compared with the previous two downcycles. For instance, eight months after peaking in October last year, global semiconductor sales fell by 22%. This compares favourably with the past two downturns when sales dropped 27% during the GFC and 38% during the dotcom bubble burst, eight months after their peaks. So, essentially, the pace of decline in global semiconductor sales has not been as severe as before at this point.

With this mixed bag of indicators, where does that leave us? We are still left guessing, unfortunately. One consolation is that the world’s largest economy is still showing some strength in its growth momentum despite increasing uncertainties globally. The US job market is astonishingly resilient for now, growing at an annual pace of over 4% in the second quarter of this year (this figure would normally be less than 2% during hard times). Similarly, non-farm payroll statistics have been resilient, increasing at a respectable pace of 178,000, five months after peaking in January this year. During the GFC, non-farm payrolls fell into negative territory five months after they topped in March 2007. The measure also contracted five months after rebounding in March 2000.

The other consolation is that the global equity market has yet to sound the alarm (although the bond market is already reflecting investors’ deep pessimism). This can be seen from the MSCI World Index, which fell by a mere 2% from its high in July this year. This contrasts sharply with the past two major downturns when the index fell by 6% and 7% during the GFC and dotcom bubble burst respectively just two months after hitting their peaks.

Moving forward, the financial market could be a crucial indicator of how the current soft patch will ultimately unfold. We are now at an inflection point. Rapid declines in the global equity market could trigger broader-based pessimism that could lead to a “Wile E Coyote moment”. Sustained upward momentum, on the other hand, could signal that the present economic weakness may just be a mild correction in economic activity. Stay tuned.

Nor Zahidi Alias is chief economist at Malaysian Rating Corp Bhd. The views expressed here are his own.

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