Fears are growing about the state of the global economy after a slump in Chinese manufacturing output growth and a dramatic slowdown in business activity across Europe and the US.
Stock markets sagged on Friday as China‘s government said industrial production and retail sales slowed in November. Traders were also spooked by surveys that showed French business activity contracted this month and the US economy slipped to its lowest growth rate for 18 months in December.
The Dow Jones index of major US companies dropped 496 points, or 2%, to close at 24,100 after the FTSE 100 closed down 0.5%, with Dax shedding 0.5% in Germany and the CAC in Paris losing 0.9%.
Oil prices and commodities slipped back on the news towards lows seen last month, with the price of Brent crude dropping 2% to $60 a barrel, while precious metals and foodstuffs all slipped in value.
“Focus has shifted from just the US-China trade war to what is going on in the global economy and what that means for earnings for the US corporations in 2019,” said Art Hogan, the chief market strategist at B Riley FBR, a New York-based investment bank.
Other analysts blamed rising trade war tensions for restricting an expansion in global trade, while others took aim at the waning influence of Donald Trump’s tax breaks, which provided a sugar rush of consumer spending for much of the year.
However, China’s short-term outlook appeared to be especially bleak as the country’s manufacturing engine spluttered heading into the new year. Beijing has faced several headwinds, including an export sector that has suffered under US-imposed import tariffs and an overpriced currency. Beijing has sought to loosen credit controls to make borrowing cheaper but so far the effects have failed to feed through to rising output.
While the US remains the world’s largest and most powerful economy, China’s difficulties had an immediate knock-on effect for US and eurozone goods exporters, which have expanded rapidly in recent years on Chinese orders for cars and industrial equipment. The economies of Germany and Japan contracted in the last quarter, according to data released this month – in Germany’s case for the first time since the the eurozone crisis of 2012.
On Friday France joined Germany in raising investor concerns. French private sector output contracted for the first time in two and a half years in December as companies were disrupted by the gilets jaunes protests. The IHS Markit flash PMI for France, which came in at 49.3 – below the crucial 50 mark that separates expansion from contraction – was the first time output across the manufacturing and services sectors had fallen in France since June 2016.
IHS Markit said the weaker French performance was a drag on business growth in the wider eurozone.
The Markit IHS survey of businesses across the eurozone dropped 1.4 points to 51.3, a four-year low, with the service sector the worst hit.
Most analysts said it was too easy to blame one-off factors, such as riots in France, for the worsening picture across the eurozone while the underlying picture was also weakening.
Jack Allen, a senior European economist at consultancy Capital Economics, said: “December’s fall in the eurozone composite PMI was almost entirely driven by a sharp drop in France, perhaps suggesting that the gilets jaunes protests have had a serious economic effect.
“But even if France’s PMI bounces back as the effects of the protests fade, the eurozone economy has clearly shifted down a gear and looks set to grow at a more moderate pace next year.”
Allen echoed the comments of the European Central Bank chief, Mario Draghi, who said this week that the risks for the eurozone “lay on the downside”.
Draghi’s comments overshadowed him halting the ECB’s €2.6tn (£2.3tn) quantitative easing programme, which was supposed to mark the near completion of a 10-year recovery across the currency bloc.
He said growth would not reach previously expected levels next year or in 2020, mainly as a result of uncertainties created by the US-China trade war, the Italian government’s budget battle with Brussels and the dispute between the UK and EU over Brexit.
Howard Archer, the chief economic adviser to the EY Item Club – a group of economic forecasters – said Brexit uncertainty and the slowing global economy would force the Bank of England to keep interest rates at 0.75% at its next meeting on Thursday.
“With heightened Brexit uncertainties currently dominating the outlook for the economy, the Bank of England looks to be firmly in ‘wait and see mode’. Even if the UK does leave the EU with a deal, the Bank of England may well delay hiking interest rates to see how the economy is performing in the aftermath of the UK’s departure,” he said.
The drop in stocks in New York and London marked the second biggest weekly exit by equity investors on record, according to Bank of America Merrill Lynch, as the market sell-off pushed traders to seek safe havens. US stock funds bled $27.6bn in the week to 12 December, the worst since February.