Wall Street Journal: Global Economic Growth Fades

The Wall Street Journal:  Stock indexes that rode accelerating global growth to fresh records in January are now hamstrung by a moderate but unmistakable slowdown in economic momentum in Europe and elsewhere.

Business activity globally has slowed from multi-year highs, according to the JPMorgan Chase and IHS Markit global purchasing managers index. The global manufacturing index fell to 53.1 in May, a nine-month low. The services index for April, which will be updated for May on Tuesday, slid to 53.8 from 54.8 two months earlier. And business activity in the eurozone fell to its lowest level in a year and a half last month. The Baltic Dry Index, a measure of shipping costs that investors often look to as a proxy for global demand, has fallen 22% from a recent peak last month. Copper prices, another gauge of economic activity, have been on the decline. Among developed economies, data on the whole have been missing economists’ expectations by a wide margin, according to Citigroup’s index on economic surprises, after easily exceeding expectations for most of 2017.

Hardly anyone expects a recession any time soon. A rise this year in energy prices is being attributed to a combination of solid demand, reduced stockpiles and producer discipline. Growth in the U.S. and some other major economies continues apace, with the U.S. nonfarm payrolls report Friday showing a gain of 223,000 jobs and an unemployment rate of 3.8%, the lowest since 2000.

The upbeat jobs report helped steady the Dow Jones Industrial Average, but not enough to recoup all of its losses from earlier in the week. The blue-chip index on Friday added 219.37 points, or 0.9%, to 24635.21. But with government bond yields near record lows in many countries and the median S&P 500 stock trading at price/earnings multiples seen only rarely in the past century, many investors are buying government bonds and other lower-risk assets in a bid to brace against what is expected to be a volatile market year. It is a safe way to proceed, they say, at a time when much of the expected upside from the global economic expansion for 2018 appears significantly less likely to be realized.

Investors’ risk-off approach has been a hurdle for the stock market. The Dow industrials have struggled to push past 25,000 since March, a feat the index has done just once before falling below the mark again, even as the Federal Reserve has stuck to its well-choreographed pace of interest-rate increases. In the U.K., the path is less certain as the Bank of England weighs whether to forgo further planned rises in its key interest rate or even ease policy depending on how its departure from the European Union proceeds. Meanwhile, trade issues and a volatile currency could force the European Central Bank to alter its own fiscal-tightening plans. “We generally think markets are in for a series of rude awakenings,” said Joachim Fels, a global economic adviser at the money-management firm Pacific Investment Management Co. The firm recently said it expects to see more market volatility.

Developments in some of Europe’s biggest economies, such as labor strikes in Germany and France in recent months and a harsh cold-weather spell across Northern Europe, are also undercutting the global growth narrative. The threat of more-restrictive trade policy has added further uncertainty to the outlook. And recent data have underscored how the economy remains sluggish, even years into the economic cycle.

Politics has also caused concern. Investors fled stocks and piled into super-safe U.S. Treasurys Tuesday after a brief stretch of turmoil over the formation of a government in Italy. The episode refocused investors on the weaknesses in Italy’s economy as European policy makers attempt to pull back on post-crisis monetary policies.

Italy’s divisions have dimmed much of the investor enthusiasm around last year’s election of the business-friendly French president Emmanuel Macron, whose victory eased fears that the Continent would be riven by anti-Europe populist movements.

Fears of a trade war sharpened after the Trump administration imposed tariffs on steel and aluminum imports from Canada, Mexico, and the EU. All three outlined their own tariffs in response, such as proposing levies on U.S. food and agricultural products. Barclays economists estimated that steel tariffs plus the toll from retaliation could reduce global growth by 0.1 percentage point. That, plus tariffs on $150 billion of Chinese goods and any retaliation, could hit growth by 0.9 point. The tariffs “reduce business confidence,” which makes it more difficult for companies to make plans and execute on them, said Gary Pollack, head of fixed-income trading at Deutsche Bank Private Wealth Management. “That has ramifications for the real economy.”

The strengthening U.S. dollar is also exposing weaknesses in the developing world. Currencies are tumbling in countries with large trade deficits and large positions of short-term dollar debt. Turkey and Argentina felt compelled to jack up interest rates in May. Indonesia also lifted rates on Wednesday to stop its currency slide.

The U.S. is once again looking like the star performer. That was reinforced Friday by data that showed the U.S. continued to add jobs at a rapid clip. The U.S. factory sector picked up in May, according to data from the Institute for Supply Management. “We’re being more mindful of the risk we’re taking outside the U.S.,” said Andrew Slimmon, a managing director at Morgan Stanley Investment Management who runs several funds, including a global equity strategy. Mr. Slimmon said he recently cut exposure to emerging markets, reaping some of the gains from last year, and increased fund allocations to U.S. stocks.