Mark Carney warns of downside risks to global economy amid simmering trade war

Mark Carney warned of damage to the global economy from rising protectionism, describing a “widespread slowdown” that may require a major policy response.

The Bank of England governor said the “intensification of trade tensions has increased the downside risks to global and U.K. growth,” citing falling business confidence and pessimism among households. He also said the U.K. faces the additional threat of a no-deal Brexit on business investment.

The comments sparked a drop in the pound below US$1.26 to the lowest level of the day and the weakest since mid-June. Money markets ramped up bets on an interest-rate cut by January, now seeing a 60 per cent probability compared 35 per cent as of Monday, adding fuel to a surge in government bonds.

In a gloomy assessment, Carney said things have changed markedly in the past year, noting that proportion of the global growing above trend has fallen from four fifths to just one sixth.

Investors are anticipating that central banks in the U.S. and Europe will shortly open the monetary stimulus taps once again and cut interest rates to support growth. Carney said such action may be needed but, echoing many of his central bank colleagues, added that governments must also step up with fiscal measures.

For the U.K., Carney said that the BOE still expects higher interest rates will be needed if Brexit goes smoothly, though it’s “unsurprising” that the market takes a different view given that traders place more weight on the possibility of a no-deal Brexit.

While the U.S. and China agreed on a truce in their stand-off at the weekend, President Donald Trump’s administration has since proposed more tariffs on European Union goods, a move related to the long-running trans-Atlantic subsidy dispute between Boeing Co. and Airbus SE. Global manufacturing is already in a slump, with reports this week showing pronounced weakness across Asia and Europe.

The tariffs announced so far will lower U.K. economic output by 0.1 per cent point, Carney said. That would swell to minus 0.4 per cent if all measures, including auto tariffs, are introduced. A big shock to business confidence could take off 1 per cent off output.

Fed Meeting

“Monetary policy must address the consequences of such uncertainty for the behaviour of businesses, households and financial markets,” he said. “In some jurisdictions, the impact may warrant a near-term policy response as insurance to maintain the expansion.”

That debate is playing out at the Federal Reserve, where part of the discussion is centred on whether the economy needs an “insurance cut” against the possibility of a slowdown, or a more aggressive move to counteract a serious deterioration already underway.

Carney added that if there is a “material trade shock, other policies, including fiscal policy, would likely need to play important roles.”

He also repeated that the BOE’s response in the event of a no-deal Brexit won’t be an “automatic” jump to a rate cut. He said action will depend on how it affects the economy and the pound.

 

Published at Tue, 02 Jul 2019 17:09:51 +0000