The global economy may have narrowly avoided a recession, with most industrial and financial indicators pointing to a slight improvement in September-October after a sharp slowdown in the middle of the year.
World trade volumes were down almost 1.5 per cent in the three months from June to August compared with the same period a year earlier, the worst performance since the recession of 2008/09.
The trade data are the most recent available from the Netherland Bureau for Economic Policy Analysis (“World trade monitor”, CPB, Oct. 25).
Since then, however, most equity and bond market indicators as well as industrial production surveys have shown the slowdown has eased.
South Korea’s KOSPI-100 equity index, normally a good proxy for trade given the country’s heavy exposure to exports, is up 11per cent since the end of August and has risen year-on-year for the first time since May 2018.
Caterpillar Inc.’s share price, another bellwether for the global economy because of its central role in the heavy industrial supply chain, is up almost 21 per cent since the end of August and is showing the strongest upward momentum since 2018.
In the bond market, the U.S. Treasury yield curve has un-inverted, with yields on 10-year notes now 23 basis points above three-month bills, from a discount of 52 basis points near the end of August.
The curve normally inverts before a sharp slowdown and then often starts to normalise shortly before the onset of a recession as the Federal Reserve cuts short-term rates.
In this case, however, investors are increasingly confident the Fed’s three interest rate cuts since July will be enough to forestall a descent into recession.
Bond traders seem convinced the earlier loss of momentum will prove to be a mid-cycle slowdown, like 1967, 1995, 1998 or 2015, rather than mark the end of the expansion, like 2001 or 2008.
Recent industrial production data from the U.S., Germany and Japan all provide some evidence the economy is turning a corner.
U.S. manufacturing output excluding motor vehicles and parts (hit by the strike at General Motors) was down 0.5 per cent in the three months from August to October compared with a year earlier.
But the rolling three-month average improved in September and October for the first time since the start of the year, suggesting that recessionary forces were easing.
Japan’s manufacturing production was down 0.8 per cent in the three months from July to September compared with a year earlier, but the rate of decline was easing.
Germany’s industrial output was also down by more than four per cent in July-September compared with a year ago, but again the rate of decline showed signs of easing.
