The Week: A new world order threatens capitalism

After significant falls this week, have markets recognised that China/US trade wars are part of a deeper problem?

  • Markets have dipped around 6% this week on mounting gloom about the global economy
  • Trump announced 10% tariffs on the remaining $300 billion of Chinese goods and accused the country of currency manipulation
  • Interest rate cuts, while welcome, aren’t likely to solve the problem

It has been a gloomy week on markets. Rather than galvanising investors into thinking that central banks have got their back, the Fed’s rate cut seems to have confirmed the slowdown in global growth. Add in some grim figures for German manufacturing and this cocktail saw a near-6% drop in the FTSE 100, with similar falls for other markets.

An acceleration in the trade war hasn’t helped. Trump said he would implement 10% tariffs on the remaining $300 billion of Chinese goods not already subject to duties. He also accused China of currency manipulation (again), after the country allowed the renminbi to weaken. China stopped making new purchases of US agricultural goods.

It shows that the problems are deeper than the trade talks. Few people now expect talks between China and the US, even if they happen, to bring a speedy resolution to the trade crisis. There appears far more at stake that arguing over tariffs. The two sides are jostling over the new economic order.

Neil Shearing, group chief economist at Capital Economics, was reported as saying that this might be ‘the end of the world as we know’. Certainly, it feels different. Established political parties are backing away from globalisation as they try to defend themselves against populism. In the old days, Republicans in the US and the Conservative party in the UK counted themselves as the parties of business. Today, both appear to be happy to discount the views of business in pursuit of a populist agenda.

In an interview with CNBC, Shearing added: “The rapid increase in cross-border movement of goods, services, capital and people that has been the defining feature of the global economy over the past two decades may be about to reverse – with macroeconomic implications that would extend well beyond the narrow impact of tit-for-tat tariffs.”

The slowdown in manufacturing is worrying, but it is possible that markets are reflected a deeper crisis. They are worried that the environment for business is in jeopardy, threatened by populism and by isolationism. A few interest rates cuts aren’t likely to solve that.

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