Skip to main content

State of the world economy worsens, storm ahead

posted onSeptember 7, 2019
nocomment

The bad news just keeps on coming for the world economy, where nothing seems to be going right.

On Friday (Sept. 6), a closely watched report from the US Labour Department showed weaker than expected job growth in the month of August.

The report said non-farm payroll employment rose by 130,000 jobs last month, below the 173,000 expected by economists polled by MarketWatch. Economists surveyed by Dow Jones had expected employment to increase by 150,000 jobs while those surveyed by Thomson Reuters had expectations for job creation of 158,000 positions.

Retail hiring declined for a seventh straight month, while in the manufacturing sector,  just 3,000 jobs were created in August. 

However the unemployment rate remained steady at 3.7% while average hourly earnings rose 0.4% month-over-month and 3.2% year-over-year.

Europe in a mess

In Germany, Eurozone's largest economy, factory production dropped by 0.6% in July, confounding expectations for an increase of 0.3%, data from Destatis revealed Friday. The drop was driven by a decline in the production of capital goods.

Separately, labour market data last week showed that seasonally adjusted unemployment rose in August.

Germany's export-driven economy is suffering due to weaker foreign demand, Brexit uncertainty and trade tensions. Gross domestic product contracted 0.1% quarter-on-quarter in the second quarter on weaker exports adding fuel to worries that the country entered a recession in the third quarter.

The picture is no rosier when it comes to rest of Europe. Britain's economy contracted 0.2% last quarter, in France  the GDP decelerated to 0.2% from 0.3% while GDP in Italy remained flat in the second quarter. 

How about Asia/Pacific and Latin America? 

Mexico just dodged a recession— usually defined as two consecutive quarters of contraction —  and its economy is expected to remain weak this year. And data suggest that Brazil, the largest economy in Latin America, slipped into recession in the second quarter.

Also on Friday, in China, the central bank cut its reserve requirement for all banks by 0.50 percentage point effective from September 16. It also cut reserve requirements for certain urban banks by another full percentage point, with half effective on October 15 and the rest a month later.

The moves came after the Chinese government announced earlier this week its intention to increase economic stimulus measures as authorities aim to revive business sentiment in the world’s second-largest economy in the face of a protracted trade battle with the U.S. 

Investors have been focused on China because weakness  in the country could filter through to the rest of the world economy.

Meanwhile, amid a deepening economic outlook, central banks from India to Thailand, from Australia to New Zealand are slashing rates. 

In July, the Reserve Bank of Australia's (RBA) quarter-point cut took cash rates to an all-time low of just 1% and left limited room for more reductions. Last month, the Reserve Bank of New Zealand cut the official cash rate by a bigger-than-expected 50 basis points to 1.00%, stunning markets, 
as headwinds for the economy from growing business pessimism compounded.

world economy imf projections

(Overview of the World Economic Outlook Projections Source: IMF)

The US Federal Reserve which cut rates last month for the first time in 11 years, is likely to lower the benchmark federal funds rate by a quarter-percentage point at its Sept. 17-18 meeting, according to the Wall Street Journal.

And weak output data reinforced the case for the European Central Bank  to take fresh action next week at its Sept. 12th policy meeting.

“The nightmare is now unfolding, and it can’t be shaken off,”  Thomas Gitzel, economist at VP Bank Group, told Reuters said after the release of Friday’s German data.

The International Monetary Fund last month cut its forecast for global growth this year to 3.2%, down from its April forecast of 3.3%.  The Washington-based institution also downgraded its expectations for 2020 to 3.5%, below its earlier forecast of 3.6%.

"The principal risk factor to the global economy is that adverse developments - including further US-China tariffs, US auto tariffs, or a no-deal Brexit - sap confidence, weaken investment, dislocate global supply chains, and severely slow global growth below the baseline," the Fund said.

The bottom line — most countries are facing a much more troubled world where storm clouds are certainly gathering and economic conditions are likely to deteriorate further. Will governments and businesses chart a course to navigate growing risks to the world economy?

line black 1300
line black 1300