Trade slows down, yes, but robust domestic demand persists in the United States....
In the United States, the unemployment rate is at its lowest level since the late 1960s at 3.7% and the hourly compensation rate is rising at a 4.4% clip, that is, nearly 2.5% after deducting inflation. Wage growth is sustaining consumer spending, up 2.7% year-on-year in the second quarter. At 8%, the household savings rate is sufficient to absorb an unexpected shock, provided it is considered temporary. However, the decline in profits and the downward revision by companies of their investment plans show that these good figures have a high cycle connotation, and are likely to deteriorate. Besides, the Trump administration is considering reducing employee contributions to support purchasing power, especially if higher import prices as a result of tariff increases continue to fuel inflation, currently running at 2.4%, excluding food and energy. But it is above all the Fed that will provide the support: the decline incorporate investment, the deterioration in cyclical indicators and the fact that bond markets are anticipating at least three additional rate cuts will probably outweigh the acceleration in wage inflation in the deliberations of the FOMC, with or without pressure from the White House.
... in Germany...
Germany is more exposed to global trade than the United States, and therefore more affected by the trade war, if only through its 5,000 companies operating in China, which explains the stagnation of its GDP in the second quarter and the warnings from the Bundesbank for the third. However, the domestic economy is in an even better shape than in the United States: at 3.2 per cent, the unemployment rate has never been so low since 1974; it reflects a severe labour shortage, which recent migration flows have only slightly mitigated. There are two German economies, in a way: on the one hand, the manufacturing and services sectors, which are closely intertwined and whose cyclical indicators are correlated, are seriously impacted by the contraction in world trade. On the other hand, retail trade, construction and housing are overheating, with business sentiment indicators at their highest level ever. Wages are rising sharply, at rates ranging from 2.5% in industry to over 4% in construction. Two opposing forces are at work in the German economy: world trade is depressing industry, while the ECB's highly stimulating monetary policy and wage pressures are heating construction and trade white hot. Eventually, the industrial cycle will have the final say, but starting from a situation of full employment and a budget surplus (the two go together), the German economy is strong enough to withstand a global blast, provided it does not turn into a contractionary spiral like in 2008.
... and even China!
Like Germany, China is dependent on world trade, and as the main target of US tariff and non-tariff measures (technology), its export sector is badly hit, as evidenced by the fall in exports (-4% in June) and the sharp slowdown in industrial production, even worse than during the 2008 crisis. However, the domestic economy is not doing so badly. For example, while the profits of state-owned or foreign-owned companies, which are generally export-dependent, fell sharply in the first half of the year (-8% and -7% respectively), those of Chinese private companies increased by 7%. Per capita income increased by 6.5% and per capita consumption by 5.2%, almost equally divided between goods and services. Supported by stimulating monetary and fiscal policies, domestic demand, and households’ demand in particular, remains strong, as in Germany, and for the same reasons.
In summary, economic conditions in the world's major economies have interesting similarities: manufacturing sectors are more or less affected by the contraction in world trade, and domestic sectors are supported by robust domestic demand, particularly households’ demand, thanks to situations of full employment and the support of macroeconomic policies. The worsening of the economic background for manufacturers, which is unlikely to reverse in the short term, is likely to spread to other domestic sectors. In this regard, it is symptomatic that, according to the compilation of opinion polls provided by YouGov, American households have become more pessimistic in recent weeks than in the past three years, despite lower unemployment and accelerating wages.
Can the debts accumulated since 2008 send us over the edge?
The most likely outcome is that the global slowdown will worsen in the coming months, and that it will be partially offset by more aggressive fiscal and monetary economic policies. Nonetheless, predicting a global recession is a step too far. Typically, recessions occur once the cycle has passed its peak, under the effect of monetary policies turning restrictive - hence the famous inversion of the yield curve - and/or the violent resolution of financial, housing or oil market imbalances accumulated during the previous cycle.