The Purchasing Manufacturers’ Index (PMI), which measures whether market conditions, as viewed by purchasing managers, are expanding, staying steady, or contracting, has shown the manufacturing sector to be largely pessimistic for the last two to three months.
Attached to that was a classic indicator of a potential recession, the yield curve inversion.
British multinational Aviva recently warned there would be a one-in-three chance of a recession occurring in the next 18 months, citing sluggish global growth and the ongoing US-China trade war.
Likewise, a survey of 200 financial institutions managing $4.1 trillion of assets in aggregate concluded the possibility of a downturn in the next year was 52 per cent. Aberdeen Standard Investments has predicted global growth of 2.8 per cent this year, the weakest economic growth since the GFC.
However, T.Rowe Price has forecast that with lessening uncertainty around the US-China trade war and Brexit, manufacturing confidence could return from its current lows, and global growth could revert.
Thomas Poullaouec, head of multi-asset solutions in the APAC at T.Rowe Rowe Price, noted the economic slowdown has stabilised.
According to him, the decline was mostly explained by two factors: central banks tightening monetary policy to the point of lowering manufacturing confidence in 2018 in addition to heightened economic uncertainty.
“The main impact of uncertainty was obviously coming from China and the US,” Mr Poullaouec said.
“We don’t believe that there [has] been a lot of long-term resolution, being done on this case but there has been at least some easing of tensions with the so-called [mini-deal] being signed earlier this month.
“So with uncertainties being reduced from China and the US and potentially from Brexit, because we are seeing the end, whether it’s the end of this month, or in three months time – at least, there’s a timeline here we can, we can point to.”
He noted the resulting lowered uncertainty would give a lessened risk to the market and could also explain improved confidence from manufacturers.
“So if I’m right that we are seeing almost an inflection point on the manufacturing cycle, the economy should rebound and potentially accelerate in the coming six to 12 months,” Mr Poullaouec said.
“And if that’s the case, there is less of an economic reason for central banks, including the RBA to get cut rates further.”
The RBA made its third cash rate cut for the year at the start of October, to its current historic low of 0.75 per cent.
A survey of Australian economists and experts by comparison site Finder in the lead up to the October decision had been divided, but the majority (55 per cent) of experts had called the slash.
Nearly three-quarters of experts in the survey (72 per cent) had predicted the rate would fall even further to 0.5 per cent before it rises again.
Yet Mr Poullaouec believes if global conditions are to improve, the Reserve Bank of Australia (RBA) is unlikely to cut rates – unless it is acting to stay consistent with its global peers and keep the Australian dollar competitive, by preventing it from appreciating.
“So, the only reason why the RBA could continue to cut rates further would be more [of] the second impact which is, if for whatever reason the Fed wants to push back to zero their monetary policy again and if all the central banks are continuing in their negative rate like the ECB and the BOJ,” he said.
“Maybe the RBA would find some good excuse to follow the other central banks, rather than looking at their economy which should be rebounding based on global factors but also based on local factors, with the housing market for example, doing much better this year than it was last year.
“So for me the RBA should be [looking at] both in my best case, but I don’t exclude a risk that they could cut rates further especially to follow the global central banks.”
