Last week we wrote about the deterioration in outlook and this week we write about the actual fallout.  We saw safe havens rallying as fears of a recession increased markedly; gold hit a six-year high and US stocks had their worst trading day in 2019.

This was led by lacklustre economic data for global manufacturing and exports.  Commodity prices continued to fall, and inflation pressures remained low.  Escalating trade tensions threaten to turn into a full-blown currency war, as China retaliated from Trump’s threat of additional tariffs beginning next month.  Global recession risks are firmly on the mind of central banks, if not the markets, which is why the interest rate cuts from New Zealand, Thailand and India came as a surprise.

What does this have to do with Thucydides’ Trap?  Thucydides was a Greek historian who wrote about the inevitable war between Sparta and Athens, which was caused by the growth of the latter and fear of the former.  The trap is being replayed between the rise of China and the fear of the incumbent US, which initially manifested itself as a trade war and looks set to evolve into a currency war.

To add to the current climate of woes, the UK’s economy contracted for the first time in seven years.  The second quarter shrunk 0.2% compared to the previous three months, predicated on increasing Brexit concerns, stock-piling ahead of the original Brexit date and of course and the effect of global trade tensions.  The signs could not be clearer for the Conservative government not to take any undue risks with the economy.

There are some silver linings if you dig deep enough.  The weak second quarter was payback for a strong first quarter, which saw manufacturers accelerating production ahead of the March Brexit date.  These inventories have now unwound, as well as many factories scheduling routine maintenance for April, all of which reduced output for the second quarter.  The contraction cannot be fully laid at the feet of Brexit though, as manufacturing and services globally are struggling, amid the trade war tensions and mixed signals from the Federal Reserve.

What is clear though, is the obvious solution for the government in order to give the UK economy a restorative boost, is to avoid the precipice of a no-deal Brexit.