From the trade war to Brexit and the Hong Kong turmoil, simmering political issues remain a threat to global growth

Recent positive developments in some of the major issues weighing on markets, including the US-China trade war and Hong Kong’s protests, offer a welcome respite. But economic fundamentals remain weak and policymakers’ toolboxes are limited

Patrik Schowitz

Published: 1:00pm, 13 Sep 2019

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Global markets are caught in the crossfire between slowing global growth and increasing policy stimulus.

Slowing trade has dragged down industrial activity, and with it gross domestic product and profits growth in the global economy. Global economic growth indicators have been falling since mid-2018, with many showing outright contraction in the manufacturing sector. And, in stock markets, expectations for global profit growth this year have dropped to less than 2 per cent from just under 10 per cent a year ago.

However, those who are cautious and might have expected this to drive markets lower have been somewhat disappointed. While equity markets in Asia have suffered, falling by nearly 10 per cent from their April peak, global equity indices are essentially flat over that time frame, and they remain close to record highs.

The main reason for stocks’ resilience has been policymakers’ determination to loosen monetary policy to prevent this late-cycle economic slowdown from turning into a full-blown recession. They have driven interest rates to near historic lows in many countries, making equities look more attractive in comparison.

Much of the downward pressure on economic growth has come from a litany of simmering political issues around the world – first and foremost the US-China trade war.

Most recently, we have seen a string of positive news on most of the political issues troubling the market. This has boosted hopes for the growth outlook as well as markets – but we should view this with a healthy dose of caution. Admittedly, in most of these cases, the probability of a really bad outcome has been reduced, but in none of them has the underlying problem really been resolved.

In Italy, the formation of a new government that is less likely to get into budget trouble with the rest of the European Union is good news, but its stability and longevity remain very questionable. In Germany, local elections did not result in an outright win for the populist Alternative for Germany party, which might have threatened the stability of Angela Merkel’s federal government. Still, it did very well in second place, and more elections are coming.

In Britain, a week of political drama saw the chances of an economically damaging no-deal Brexit appear much reduced, but it still remains a real possibility, alongside a number of other negative outcomes.

Here, Hong Kong stocks welcomed the withdrawal of the extradition bill with a 4 per cent jump on the day, but it is clear that local unrest remains far from resolved.

And, most importantly, in the saga of the US-China trade negotiations, another high-level meeting was finally agreed, raising hopes of progress towards a resolution. However, there have been so many false dawns in this process that it’s hard to tell how significant this development really is.

So if it’s too early for an all-clear on geopolitics, much still rests on the shoulders of policymakers. The world’s major central banks such as the US Federal Reserve and the European Central Bank seem determined to do what they can, and most smaller central banks are joining in.

However, with interest rates already very low, it is not clear how much impact they can have in the case of a big negative political shock, such as a further escalation of US-China trade tensions.

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In the meantime, pressure is building for developed-economy governments in particular to help by loosening fiscal spending. Given the political realities, this is more likely to be a case of too little, too late. China might yet again prove to be an exception, for now at least, given its ability to unleash monetary and fiscal stimulus much faster and in a more coordinated way.

Stepping back from the short-term political noise, the focus should be on economic fundamentals, which are continuing to worsen, although they are not yet disastrous.

If there is no further trade upset, the global economy can probably stabilise. But, even if that happens, the potential is limited for a re-acceleration in economic and corporate profit growth. The global economy is already in the late cycle and policymakers seem to be running out of ammunition and ideas.

Overall, the risks for markets if things go wrong look bigger than the potential upside if things go right. It would be better to remain cautious despite surprisingly robust equity markets. To abuse an old saying, a few political swallows do not a summer make.

Patrik Schowitz is a global multi-asset strategist at JP Morgan Asset Management

This article appeared in the South China Morning Post print edition as: Simmering political issues remain threat to global growth

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