A few weeks ago, the Fulcrum nowcasts identified a sudden slowdown in economic activity in the eurozone, Japan and the UK. At the time, the soft patch seemed to be focused mainly on the eurozone, where extreme cold weather might have been partly responsible. With the US and China showing no signs of weakness, the slowdown was still a fairly localised phenomenon.
More recently, however, there have been three main developments that suggest this assessment may need to be changed.
- First, the rebound in activity in the eurozone since the weather improved has been very limited, indicating that at least part of the soft patch may have more fundamental causes.
- Second, there have been clear signs that the US growth rate has dropped, albeit less than the decline in Europe, and from exceptionally high cyclical rates early in 2018. Growth in the US remains half a per cent above trend, but is now falling fairly sharply.
- Third, growth in the eurozone and Japan are no longer above trend. Furthermore, the UK is an important outlier on the low side, with growth running at only about 1 per cent, roughly half a per cent below trend. Brexit effects on confidence may be starting to manifest themselves.
The good news is that China has so far managed to avoid the weakening phase almost entirely, and continues to grow close to trend. Nevertheless, the overall global picture can no longer be described as one of synchronised, above-trend growth. Whether the current phase of slowing growth is just a return to its normal trend or will develop into a more serious cyclical slowdown is up for debate. We see little firm evidence for the more pessimistic interpretation so far.
The latest monthly nowcast report is attached here.
Global activity more subdued
The world growth rate (measured at PPP exchange rates) hovered around 4.5-5 per cent annualised throughout the second half of last year, roughly a full percentage point above trend. This led to optimism that the world economy might be breaking clear of the shackles that have constrained it for a decade, but growth began to subside early in 2018. It fell slightly below the 3.6 per cent trend rate for a while last month, but the very latest survey data have recorded a modest rebound, alleviating fears that recessionary forces have now taken hold.
The key question is whether this is just a temporary soft patch which will quickly stabilise, or even rebound.
The nowcast models will be an important way to track future developments. The projections produced by these models so far indicate that the decline in growth represents nothing more than a return to “trend”, with growth being likely to remain around that underlying rate.
However, the nowcast system produces that forecast almost by construction, since it will automatically predict the growth rate to remain close to the identified long run trend, once shorter-term dynamics in output have worked through the system.
Some additional guidance about the future — albeit only indicative — can be derived from the details within the PMI survey data for the global economy. Taking the manufacturing and service sectors together, these surveys showed a drop of 1.2 points in the overall growth indicator (the output diffusion index) in March, compared to the average of the three previous months, but the index staged a modest rebound of 0.5 points in April. More important, the gap between new orders and output indices, often used as a leading indicator, has improved in April, especially in the global services sectors.
Advanced economies slow more than emerging economies
Among the major economies, the latest slowdown has been far more pronounced in the advanced economies (AEs) than in the emerging economies (EEs). The AEs have slowed by a remarkable 1.50 percentage points in the past few months, though the starting rates were so elevated that this still leaves the latest nowcast about 0.25 points above trend.
By contrast, the EEs have slowed by less than a point, thus returning to trend. Chinese activity data temporarily seemed to be weakening about a month ago, but this has stabilised following the slight easing in policy, apparently sanctioned by the politburo in late April. In other Asian economies, there has been a slowing in exports due to a weakening in the technology sector, following a slowdown in the global demand for smartphones, and disrupted supply chains amid talk of new tariffs on Chinese exports to the US. This represents a major downside risk to global activity this year.
Eurozone slowdown followed by US
The slump in the eurozone nowcast started in mid-January, driven by unexpected weakness in German and French manufacturing business surveys. Further weak surveys were followed by generalised declines in hard data up to the middle of April, but the period of freefall seems to have ended then. The nowcast has since rebounded by half a point.
In the US, the nowcast was immune to the European slowdown until mid March, and even seemed to be strengthening for a period, but since then data surprises have weakened, and the economy seems to have slowed towards trend.
The US-eurozone growth gap has therefore narrowed in the past few weeks, though it still remains firmly in favour of the US.
The period of above-trend, synchronised global growth has now definitely been punctured. This was to be expected given the recent headwinds to consumer real incomes following the rise in oil prices and headline inflation and the extent to which growth had risen above long-term trends in the second half of 2017. But the extent of the decline has clearly surprised markets, especially in the eurozone.
The good news is that global profits have been rising at the strongest rate in the economic upswing, and this is still being translated into fairly buoyant labour markets and firm investment expenditure in the AEs. Until business confidence is dented, the global expansion should prove resilient to tighter monetary conditions in the US, and waning market confidence in the EMs.
Nevertheless, it would not be too surprising if the maximum growth rates for the entire cyclical expansion are now in the past.
Appendix — Nowcasts for the Major Economies