International Economic Week in Review: Death By 1,000 Cuts

Last week saw the publishing of additional commentaries expressing concern about global growth. The FT’s monthly “nowcasts” indicate a lower rate of growth is on the horizon:

The world economy is still very far from a recession, but the nowcasts show clearer signs of a slowdown in global activity growth.This probably started in early 2015, but the downward momentum has gathered pace since the beginning of 2016. The model’s estimates of global GDP growth (blue line) have declined from 3.4 per cent in late 2015 to 2.9 per cent now, a development which warrants careful monitoring.

It is clear that the advanced economies have slowed significantly since last November.

RBA head Stevens observed similar developments in the RBA’s policy announcement:

Recent information suggests that the global economy is continuing to grow, though at a slightly lower pace than earlier expected. While several advanced economies have recorded improved growth over the past year, conditions have become more difficult for a number of emerging market economies. China's growth rate has continued to moderate.

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Financial markets have once again exhibited heightened volatility over recent months, as participants grapple with uncertainty about the global economic outlook and policy settings among the major jurisdictions. Appetite for risk has diminished somewhat and funding conditions for emerging market sovereigns and lesser-rated corporates have tightened.

Everyone seems to be jumping on the “slow growth is ahead” bandwagon. The reason is simple: there is scant evidence to support a strong growth argument. The BRIC meme is dead; China is slowing while Russia and Brazil are in a recession. The global commodity rout has negatively impacted a large number of smaller emerging economies. Japan contracted in the 4^thquarter, the US saw a sharp 4Q slowdown and the EU is barely growing.  India is the only potentially positive story, and it isn’t large enough to make a dent in the negative news.

Markit released a trio of UK reports, starting with Monday’s 50.8 manufacturing number. This was a 2.1 point drop from January’s release.  Weaker exports, employment and production caused the decline. The construction index also weakened, falling 1.4 points to 54.2. Output, new orders and employment were all lower. Overall demand also dropped while uncertainly increased. But this index has printed between 55 and 60 for the last year, indicating a fairly strong level of activity:

Finally, the service index moved lower by 2.9 points to 52.7. This was the slowest pace since May 2013. And, this index is moving progressively lower:

Overall, analysts interpreted the UK data negatively.

Chinese data disappointed. The manufacturing PMI declined from 48.4-48. Employment, output and new orders were all weaker. This index has been below 50 for nearly a year: 

The service sector is still expanding, but that index also dropped, moving from 52.4-51.2. The decline in new orders was a primary reason for the drop. But the most concerning development was the 49.4 composite reading, indicating that the service sector’s growth is insufficient to prop up overall growth. This chart of the data shows the overall index fluctuating around the 50 level for the last several months:        

Markit released a pair of Japanese numbers. The service number decreased from 52.4-51.8 – its lowest reading in 11 months. Employment is weaker but still positive. The manufacturing index decreased 2.2 points to a barely positive 50.1. Internal indexes for domestic and international demand and new orders were all lower. For an economy that contracted in the 4Q, the Markit numbers were not encouraging.  In other news the unemployment rate decreased to 3.3%:

But this low level hasn’t translated into more robust consumer spending. In fact, a contraction in consumer spending was a primary reason for the 4Q15 GDP contraction.   

Australian GDP increased 3% (SA) Y/Y, driven primarily by household spending. Business investment and trade are still contracting:

Furthering the GDP trend, retail sales rose .3% M/M in January. Finally, the RBA maintained their current 2% rate, offering the following observations of the Australian economy:

In Australia, the available information suggests that the expansion in the non-mining parts of the economy strengthened during 2015 despite the contraction in spending in mining investment. This was reflected in improved labor market conditions. The pace of lending to businesses also picked up.

Inflation is quite low. With growth in labor costs continuing to be quite subdued as well, and inflation restrained elsewhere in the world, inflation is likely to remain low over the next year or two.

The natural resource sector has subtracted from growth for the last year, and will continue to do so. However, other sectors are in decent shape and inflation is contained.   

Canada grew .2% Q/Q in 4Q15, the second consecutive quarter of expansion. But like Australian growth, Canadian households were the sole reason for the expansion; the business sector is still contracting:

Finally, the Markit Canadian manufacturing number increased .1 to 49.4, which analysts interpreted as “steadying.”  But thanks to a low Loonie, export orders were their highest in 4 months. While it appears the worse of the oil slowdown may be over for Canada, they still have a big hole to climb out of.

This week’s news continued the recent trend of “nicks” in the data: Markit’s headline numbers moved lower while individual reports' internals declined.  Developing country weakness is seeping into the US, Japan and EU. Overall volatility is up while interest rates are down.  Inflation is still hovering at low levels and global trade is off. Nothing is pointing to an imminent collapse; instead, growth is grinding lower. The ultimate concern is that it will stop, which is not unwarranted in the current environment.