Economic Recovery Doesn’t Hang on Trump’s Trade Deal

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Can a landmark trade deal between the U.S. and China fix the world’s economic problems? Luckily, it may not have to.

Investors face a contradiction: Stock markets so far in January have been full of new-year optimism, buoyed by the trade truce, but economic data hasn’t gotten much better.

On Wednesday, Germany said economic growth in 2019 was the slowest in six years. This came two days after the U.K. said its gross domestic product had shrunk unexpectedly in November, leading investors to expect the Bank of England to cut interest rates later this month. Last Friday, U.S. employment came in below economists’ forecasts.

Meanwhile, markets are priced for a sudden economic turnaround. Analysts expect the earnings of S&P 500 companies to grow by 5% year on year in the first quarter of 2020 and accelerate from there. Earnings in the third quarter shrank and are expected to have shrunk again in the fourth.

Pinning so much hope on the deal with China seems shortsighted. President Trump’s trade war offers one explanation for the global manufacturing slowdown, but there are longer-term problems too, such as a structural decline in Chinese imports and the auto industry’s transition to greener technology.

Beneath the surface of the headline data, though, there are signs that investors could still—mostly—get what they want.

A few days ago, China’s export freight rates, as collected by the Shanghai Shipping Exchange, suddenly jumped to their highest level since 2015. This indicator traditionally leads moves in Chinese exports themselves. The price of copper, another closely watched bellwether for the health of global trade, is up more than 7% over the past two months.

And although surveys of purchasing managers in the eurozone—a particularly export-dependent region—have pointed to continued weakness in manufacturing, the indicator for new export orders has been edging up in recent weeks.

Even this week’s gloomy German data had a silver lining: A big chunk of the slowdown last year was due to companies running down their inventories, an effect that had its most negative contribution to GDP growth since 2012. Despite weaker demand, it is likely that car manufacturers and others will need to replenish their component supplies soon, thus providing a modest boost to production.

Pinning so much hope on the deal with China seems shortsighted. Photo: Gripas Yuri/Zuma Press

Inventories may already be rebuilding in the U.S. chemical sector, analysts at Bank of America Merrill Lynch pointed out this week. They cite a jump in the barometer published by the American Chemistry Council, which tends to lead broader industrial surveys like the ISM.

Indeed, leading indicators tracked by the Organization for Economic Cooperation and Development as a guide to turning points in Western nations’ business cycles now seem to place the low point for economic activity in September of last year. Tellingly, this was before the prospect of a trade deal really emerged.

The sudden and massive rebound in earnings growth that investors expect certainly seems a tad exaggerated. But optimism about Mr. Trump’s new trade deal may have come exactly at the right time—even if it is mostly coincidence.

Write to Jon Sindreu at jon.sindreu@wsj.com

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