WHAT IF GLOBAL GROWTH FALTERS NOW? / THE WALL STREET JOURNAL

What If Global Growth Falters Now?

Commodity markets—and global industry— are starting to send concerning signals

By Nathaniel Taplin

A worker walks past a mound of scrap steel at a plant in Dalian, China last month. Commodities markets began selling off at the end of last year, a potentially worrying sign amid escalating trade tensions between Washington and Beijing. Photo: China Stringer Network/Reuters


This week’s headlines have all been about trade wars—real or imagined. But the response from economists has been largely sanguine: global growth itself appears to be holding up well.

But is it really? Commodity markets—and global industry— are starting to send some worrying signals. 
While manufacturing in most big economies is still expanding, the pace of those gains has slowed noticeably in recent months. Meanwhile, key industrial commodities like copper and aluminum also started selling off in late 2017, well before trade worries started spooking markets.



STTUTERING?
Manufacturing purchasing managers' indexes


Source: Thomson Reuters,
CEIC Note: Over 50 indicates expansion on the month.




The implication: The strong global manufacturing rebound evident since late 2016 may have already—or be close to—peaking, whether or not a true trade war erupts.

Slowing momentum in China has been evident for months. A modest bounce after February’s Chinese New Year notwithstanding, China’s official manufacturing Purchasing Managers’ Index appears to have peaked in the third quarter of last year, while Caixin’s alternative index has also trended sideways since then.

What’s new is that other major indexes are now following suit.

Markit’s Eurozone PMI is down four points since December, although it still remains comfortably above the 50-point mark separating expansion from contraction. Japanese and Korean PMIs have also nudged lower. Even in the U.S., strong headline numbers have masked slowing growth in new orders since the fourth quarter of 2017, along with a rebound in inventories.

Pigs ready for market at an Iowa farm this week. China has proposed tariffs on American pork and other imports in retaliation for those on Chinese steel and aluminum. Photo: Craig Lassig/EPA/Shutterstock 


Given the numbers coming out of industry, it’s not surprising to see commodities struggling too.

Although oil has held up relatively well on the back of rising geopolitical concerns, copper and coal prices have shed over 5% since late December. Aluminum prices are down over 10%, and iron ore is off nearly 9%.

Their weakness is particularly striking given that the dollar has continued to slide over the same period—which usually helps commodities.


HEAVY METAL
Commodity price indexes, 9/2008 = 100.
Source: Thomson Reuters, CEIC


Some of that weakness—particularly for aluminum, an early target of U.S. President Donald Trump’s tariff ire—is likely related to rising trade tensions and rebounding Chinese production following the end of winter output curbs.

But the fact that the sell-off is so broad-based, and started around the time global PMIs began peaking, suggests slowing industrial growth is the main culprit.

That’s not to say another manufacturing recession is near. But for the first time since early 2017, major PMIs are all pointing towards slower, rather than faster, growth ahead.

Investors hoping comforting tales of a synchronized global uptick will protect their portfolios from severe damage even if trade tensions keep rising should think again.