Recession jitters on falling global data

  • Economy
  • Monday, 07 Jan 2019

FALLING manufacturing data, especially in the two most powerful economies, is giving rise to recession jitters.

Despite the overall strength in the US economy, the spiral downwards can snowball if timely measures are not taken.

Trade war angst, rising borrowing and production costs, supply chain disruptions and erosion of confidence are, among other things, causing the global slowdown.

This will hit earnings, for example, Apple has guided for lower revenue for the first quarter of fiscal 2019 and auto companies operating in China are seeing slower sales.

As manufacturing data worldwide registered mostly drops for December, some places look poised for further falls.

With the situation getting dire, the United States and China should speed up their trade negotiations and not issue promises of “big progress” being made while further tariffs lurk in the background.

The Federal Reserve should stop raising rates, as the combined effects of aggressive rate hikes and balanced sheet reduction look set to impact growth.

Following the damage done by a December rate hike, all eyes are on Fed chairman Jerome Powell who now says the Fed will be flexible on rate increases and shrinkage of balance sheet.

Apart from falls in Asian manufacturing indexes, those in the United States have suddenly fallen to their lowest levels in two years.

In the United States, the overall Institute for Supply Management manufacturing index fell to 54.1 in December, the lowest since November 2016, from a peak of 61.3 in August. The Dallas Fed manufacturing index for December dropped 22 points from November to minus 5.1, its lowest level in more than two years.

Texas, which feels the big hit from tariffs, is the top exporter of manufactured goods in the United States.

The Philadelphia Fed manufacturing index fell to a seasonally adjusted reading of 9.4 in December from 12.9 in November, its lowest level since August 2016.

The Richmond Fed index of manufacturing activity in the Fifth Federal Reserve District fell to minus 8.0 in December from 14 in November, affected by lower indexes for new orders and shipments (the shipments index, at minus 25, was the lowest since April 2009).

Kansas City’s Fed survey showed a drop in December in the manufacturing index for the Tenth District, to 3.0 (15 in November), as indexes for production, shipments and backlog orders fell.

In China, the Caixin/Markit manufacturing Purchasing Managers’ Index (PMI) fell to 49.7 in December from 50.2 in November, the first contraction in 19 months (a reading below 50 signals contraction).

Japan’s economy has also contracted for two out of the past three quarters; its gross domestic product shrank at an annualised 2.5% in the third quarter, the worst since the second quarter of 2014.

“This is very concerning. It won’t take very much more for a recession to emerge globally,” said Pong Teng Siew, head of research, Inter-Pacific Securities.

Closely watched will be, among other things, US weekly jobs claims, non-farm payrolls, consumer confidence and housing starts. US jobs data may be strong now but it is a lagging indicator, often getting revised only eight months later; it can remain strong until practically on the eve of a recession.

Bear markets normally precede recessions by many months, and more sell-offs could be coming up on Wall Street.

Growth in global export volume had shrank to 3% in the second quarter of 2018, from a peak of 5% in the third quarter of 2017.

Since the financial crisis in 2008, average year-on-year global export volume growth had been 4.4%.

“The slide in regional PMIs, notably that of China, is indeed worrying as it reflects the general softening of production and orders amid slowing global demand and persistent trade tensions,” said Lee Heng Guie, executive director, Socio Economic Research Centre.

The Nikkei Taiwan manufacturing PMI fell to 47.7 in December from 48.4 in November, the lowest since September 2015, with weakness expected into 2019.

The Singapore Institute of Purchasing and Materials Management manufacturing PMI fell to 51.1 in December from 51.5 in November, which was the fourth consecutive slowdown in factory activity.

Marking Malaysia’s third straight month of decline in factory activity, the Nikkei Malaysia manufacturing PMI sank to 46.8 in December, from 48.2 in November, with output and new orders falling at faster rates. Being a trade-dependent nation, slower demand – if it persists – would affect Malaysia’s headline growth this year.

“Domestic demand, which is relatively resilient, can to a certain extent, cushion the impact of softer global trade,” said Nor Zahidi Alias, chief economist, Malaysian Rating Corp.

Yet Asia is still relatively fast-growing with low equity valuations, while trade tensions are being resolved, said Danny Wong, CEO of Areca Capital.

Columnist Yap Leng Kuen hopes leaders do not fumble towards a recession.

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