Trade war to blame for CapEx bust
Uncertainty over trade policy is crippling investment and driving a slowdown in the global economy
Some of the world’s largest economies are shrinking and all of them are slowing, thanks in large part to the threat of trade war.
Tariffs imposed by the United States and China’s retaliatory tariffs have had little direct impact on growth, to be sure, but uncertainty over trade war has cut deeply into investment plans. Trade in capital goods appears to be driving the slowdown.
Japan, the world’s third-largest economy, shrank at a 0.3% annual rate during the third quarter. Germany’s economy shrank by 0.2% during the third quarter, and government economists think that the fourth quarter will show negative numbers as well, leaving the world’s fourth-largest economy in recession. Sweden and Switzerland also reported negative growth of -.02% during the third quarter.
Trade war leaves companies uncertain of where and when to invest. Manufacturing managers are trying to work out whether to move Chinese production capacity to other Asian nations in order to avoid American tariffs, or whether to stay in China or do nothing at all. The uncertainty appears sufficiently pervasive to cause an economic downturn in some of the most trade-dependent nations.
In separate statements yesterday, International Monetary Fund Managing Director Christine Lagarde and US Federal Reserve Chairman Jerome Powell warned of the danger of slowing global growth. In a surprise turnaround, Powell said that the Federal Reserve’s short-term lending rate was “just below neutral,” in sharp contrast to consensus expectations that the Federal Reserve would raise the rate by 0.75% to 1% over the next year.
The regulators’ caution is well founded, judging from available data on international trade. Overall world trade growth has slowed from about 5%-6% year-on-year to only 2% a year as of September, the last month for which data are published by the Netherlands Central Planning Bureau.
Forward-looking data, though, suggest a steeper drop will follow soon, led by shrinking capital goods exports. German survey data show that the percentage of firms exporting higher exports during the next three months has fallen from 20%-25% at the beginning of 2018 to around zero at the moment.
Germany is the world’s second largest exporter, and is concentrated in capital goods. The US and Japan both have seen a marked slowdown in capital goods exports. US imports and exports of capital goods (excluding autos) were growing at a double-digit clip earlier this year. As of October, year-on-year growth was just above zero.
Japanese capital goods exports have also slowed.
Capital investment has been weaker than expected in the United States. During the second and third quarters, companies in the S&P 500 index spent more buying back their own equity than on capital investment, a disappointing result after a large corporate tax cut.