The global economic slowdown caused by the U.S.-China trade war is becoming obvious. On the one hand, the economic slowdown in developed countries and regions like the United States, the European Union and Japan is increasing. For instance, the U.S. ISM manufacturing index for May is 52.1, which is the 31-month low since October 2016. Europe’s manufacturing PMI data for the month of May also shows continuous shrinkage. The initial PMI for the manufacturing sector in the Eurozone was 47.7 in May, with the previous value being 47.9 and the expected value at 48.1. Meanwhile, the manufacturing PMIs in Japan and South Korea fell below the threshold. On the other hand, the economic growth rate of emerging market countries like China has slowed down as well. China's economic growth rate since 2019 has been maintained at a low level for many years, while India's GDP in the first quarter of this year was 5.8% year-on-year, which was its lowest since June 2014. In addition, a number of international economic organizations, including the World Bank, the International Monetary Fund and the World Trade Organization, have begun to lower their global trade and economic growth expectations.
The apparent slowdown in the global economy has caused the Federal Reserve to suspend interest rate hikes. In the face of pressures from the U.S. President Donald Trump, American monetary policy makers have begun to be more “Dovish”. Anbound has previously pointed out that the Fed's monetary policy has become more and more "Trumpized". It is worth noting that the global economic slowdown may push the central banks around the world to adjust their monetary policy, causing major adjustments in monetary policies by some of the major central banks from austerity policies like the withdrawal of quantitative easing and shifting interest rate hikes back to maintaining easing policies, or even encouraging further loosening. Although the United States, Japan and the European Union have yet to announce interest rate cuts, they have however adopted a wait-and-see attitude. However, some economies are obviously unable to shoulder on and have resigned to announcing a rate cut.
It is worth noting that the latest rate cut came from Australia. On June 4, the Reserve Bank of Australia announced that at the start of the first rate cut cycle, the cash rate was cut by 25 basis points to 1.25%. This is the first time the Reserve Bank of Australia has cut interest rates since August 2016, and the cut was in response to weak inflation and economic growth, as well as rising unemployment. As such, Australia became the second developed country after New Zealand to announce a rate cut. Earlier, the market expected that Australia would announce a rate cut in May.
In addition to these two developed countries, some developing countries too have also announced interest rate cuts. For example, on May 7, Bank Negara Malaysia announced that it would cut the overnight policy rate (OPR) by 25 basis points to 3%. This is the first time the country has lowered its benchmark interest rate since July 2016, and it is the second Asian country to cut the interest rates after India this year. On February 7 and April 4 respectively, the Bank of India lowered its benchmark interest rate by 25 basis points, reducing the current benchmark interest rate to 6%. The market expects that India will cut interest rates by 25 basis points on their upcoming interest rate meeting on June 6.
It is worth noting that more economies are choosing to cut interest rates. While the interest rate cuts of these countries are insufficient to completely overturn global monetary policy, this actually paints a picture of the global economic environment that is not exactly optimistic. Those countries that opt for interest rate cuts may be relatively weak in responding to external shocks, and they are hoping to stimulate economic growth by adopting such measures. Large developed economies such as Europe, the United States and Japan have greater economic flexibility and are thus more capable of responding to external shocks. Given this, they will not cut interest rates as easily. However, when the global economic environment continues to deteriorate, these large developed economies may also be persuaded to adopt interest rate cuts.
In the case of China, it is still necessary for China to pay close attention to the interest rate cuts of other economies although it has yet to impose interest rate cuts. Whether be is emerging market countries or developed countries, interest rate cuts will inevitably affect international capital flows as a whole to a certain extent. In the current times where there is a global capital surplus, interest rate cuts will push up the asset prices of the relevant economies, and international capital may also be attracted to these countries. For example, the Indian stock market has recently seen a new high since the past decade. With the increase of countries implementing interest rate reduction, the frequency of such international capital flows may increase, and may even have a certain degree of impact on China that is docking international capital markets. This is especially true when there is a trade war without decisive outcome. In this case, the capital flow will have a magnifying effect. Therefore, China must be well-prepared for this.
Final analysis conclusion:
The worsening global economic environment has caused more countries to take the measure of implementing interest rate cuts, which may further agitate the global market. This is an eventuality that China must prepare for.
