Is the global economy thriving, diving or both? Perhaps quantum theory can help

Earlier this year, IBM unveiled the first ever commercial quantum computer. In quantum processing, unlike the binary code programming of older computers, something can exist as a 0 or a 1 and everything in between, all at the same time.

That’s akin to Schrödinger's cat, which in the famous thought experiment would be both dead and alive if quantum theory were applied. It was meant to show that simple misinterpretations of theory can lead to absurd results which do not match the real world.

Today’s economy, where different sectors are exhibiting differing signs of life, is similar. So, is the proverbial cat dead or alive, or both?

When it comes to the corporate outlook in the manufacturing sector, things have been on the slide. The global purchasing managers’ index (PMI) for May did not paint a hopeful picture. These indices have been a dependable proxy for economic growth, with a move below 50 indicating a contraction in manufacturing activity and growth in the months ahead.

There had been tentative signs that the weakness in global manufacturing had found a bottom, but the deterioration in trade reignited the decline. In May, the global manufacturing PMI dipped below 50, the lowest level since 2012. The weakness is centered in the economies most reliant on trade, including South Korea, Taiwan, Japan and Germany.

These business surveys are an excellent barometer of corporate health. This is because deteriorating corporate sentiment usually leads to a decline in business investment, creating a much more real economic effect.

The willingness of companies to spend and invest in new capital is important. In late 2016 and through 2017, the synchronized global growth story and rising levels of capital investment were heralded as a means to extend the already prolonged business cycle. Greater capital investment would mean better-resourced workers, increasing productivity and providing a potential boost to growth, even as labour markets tightened.

However, the souring of the trade narrative globally undermines business confidence and reduces the probability of much-needed corporate investment to provide another leg up in the economic cycle.

As worrying as the decline in the manufacturing outlook is, there is no immediate threat of recession. The manufacturing sector is taking the initial brunt of the trade dispute, as it is easier to levy tariffs against goods than to find ways to block the movement of services across national borders.

For many developed countries, the still-resilient services sector makes up a much large sharer of economic activity than the manufacturing base. But, worryingly, the services PMI has dipped in May as well.

The relative strength in the services sector is perhaps a reason why labour markets have been improving and the unemployment rate is at multi-decade lows in some economies. Consumer confidence in the euro zone and the US are at their highest levels so far for the year.

In this instance, our hypothetical cat would seem to be doing OK. While consumers are still happy and employed, the economy should continue to tick along.

The risk is that, the longer the uncertainty is being imposed on the manufacturing base from the trade dispute, the further the retrenchment in capital expenditure seeps into the services sector.

It is easier to cancel spending on new equipment than to start reducing staff numbers, which is perhaps why the swings in business spending can feel like a mini-cycle relative to the slower moving labour market. But the longer the trade tension is ratcheted up, the more likely it is that companies stop hiring and then start firing as they seek to reduce costs and protect profits.

The outlook is hardly binary, as there are a range of possible outcomes. Some may think the cat is dead, based on the manufacturing sector and the threat of rising tariffs only making the situation worse. However, the services sector holds the keys to employment and consumption, suggesting that our cat may be in limbo, but with a few more lives left.