Source: Fidelity International, February 2019
No sector spared
The FLI Cycle Tracker plunged deeper into the ‘bottom-left’ quadrant (growth below-trend and decelerating), after wallowing there for over three quarters. This suggests that the global deceleration seen in late 2018 has intensified further. The FLI’s year-on-year growth is essentially at post-financial crisis lows, while the three-month growth rate plumbed its weakest since 2009. The FLI quantitative ‘bet’ fell further, remaining negative for the third consecutive month, now down to the 10th percentile of its history.
The FLI is designed to lead the OECD IP, which took a large leg down at its latest reading; manufacturing now shows zero growth year-on-year.
All five FLI sectors are now mired in the dreaded ‘bottom-left’ quadrant:
- Business Surveys continued to grind steadily lower, after tentative signs of stabilisation last month. While the US held up overall, Chinese surveys slumped further into contraction, which was mirrored by the rest of the world.
- Consumer/Labour weakened and spent a second month in the ‘bottom-left’ quadrant, driven most recently by significant falls in US consumer confidence. It seems likely that the equity market sell-off and government shutdown contributed heavily to this; with these having now reversed, next month could see some relief. That said, US jobless claims spiked last week, which has not yet been captured by the FLI, and that creates commensurate downside risks.
- Industrial Orders has been a significant swing factor, transitioning from the ‘top right’ quadrant back into the ‘bottom-left’ quadrant over the past two readings. The main incremental driver was Germany’s new foreign orders, which plunged yet again, as Eurozone data shows renewed signs of weakness. US inventory/sales data could not be updated this month due to the government shutdown.
- Global Trade remains the worst performing subsector. The negative payback from ‘front-loaded’ demand in Asian supply chains is one key factor behind this deterioration, ahead of now-postponed US deadlines for tariffs on Chinese goods. The slumping tech/semiconductor cycle is also driving bellwether export data lower.
- Commodities-related components remain soft, but are holding up relatively well. That said, the faltering Baltic Dry Index may weigh heavily on subsequent readings if it extends further.
Fed policy, lower oil prices might help
Key drivers of global growth are still negative on balance, despite some signs of policy easing.
US monetary policy has clearly responded to the problems underscored by latest FLI reading, with the Fed effectively freezing rate hikes and signalling greater flexibility on quantitative tightening (QT) balance sheet reduction. The impact on asset prices has been clearly positive. If this u-turn leads to more pronounced US dollar weakness, that would provide a meaningful boost to global activity. A less-positive US fiscal impulse is also meaningful, but should subtract only around half a percentage point from US domestic growth.
Oil prices seem to have stabilised after a moderate rally that followed OPEC cuts, while US crude supply growth should provide a roof to prices. Lower, but still orderly, oil prices would be a boost for global growth this year.
China is main headwind
China’s slowdown is likely the main headwind in 2019, as activity deteriorates further. The country’s weakness has been driven by a sharp slowdown in credit growth and infrastructure spending, coupled with reduced access to credit for private companies. The numerous measures adopted by Beijing to date may not be enough to prevent a further slowdown, as they still look significantly smaller than past efforts and prior rounds of debt-fuelled stimulus have left Beijing with limited flexibility.
Investors have taken some succour from the Fed easing its tone and incremental policy measures in China. Whether this will be enough to turn around the FLI’s well-entrenched downtrend is a different matter, and perhaps the most important question.