World industrial production growth halved in 2019H1 to 1.5% from 3% in 2018, suffering because of a slowdown in China, the widespread downturn in the automotive sector, and the unpredictable trade negotiations between the US and the rest of the world, particularly China.
In response, metals demand in major economies have contracted. CRU's base case view is that IP will modestly recover in 2020 (rising to 2% y/y), but the risks to our IP forecast lie to the downside. CRU's models suggest that the probability of a recession in the US and Germany is at ~40%, the highest it has been since the Global Financial Crisis. Recession in the US would prolong the global industrial slowdown by another 12-18 months making the recovery 'u' rather than v-shaped.
Metals demand usually falls during an industrial downturn
In 'Slowdowns felt more acutely by metals industry', Global Economic Outlook July 2019, we noted that the industrial sector tends to feel the pain (and gain) of the economic cycle more intensely than other sectors of the economy. When things are good in GDP terms, they are often better in terms of IP. Conversely, when world GDP deteriorates, the downturn in terms of IP is even worse.
Historically, metal consumption is highly correlated with world IP – when world IP falls, so too does metals consumption; although the sensitivity of metals consumption to a given change in IP has varied over time. Between 1960 and 1990 a 1% decline in IP was associated with a 2% fall in metals consumption. However, our analysis suggests the relationship is now less elastic and closer to 1:1.
Recession fears are rising in the US and Germany
In Germany, the combination of a global industrial slowdown and challenges in adapting to new emissions standards in the auto industry are weighing on manufacturing sector exports. This has led Germany's economy to contract in 2019 Q2.
In the US, worries that the longest expansion on record might end soon have been fuelled by slowing momentum in consumer sentiment and a protracted weakness in manufacturing. A US downturn is also a concern because – given it has been the largest economy in the world (since 1871) – the large trade and financial linkages that the US has with other economies have caused a US recession to often lead to a global downturn. "When the US sneezes the rest of the world catches a cold," as Klemens von Metternich's said.
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