Mixed components 

Only two sectors were in the top-right quadrant showing above-trend and accelerating growth, while two were in the bottom-left of below-trend and decelerating growth. Business surveys continued to stay positive: service-sector surveys seemed to ‘catch down’ towards their manufacturing counterparts, while manufacturing, conversely, showed signs of bottoming. New orders/inventories ratios continued to rebound, while the global manufacturing PMI is modestly reaccelerating. 

Commodity-linked components also extended their positive run, despite slowing. Surveys of forward orders strengthened, offsetting a sharp fall in the Baltic Dry index as it unwinds prior gains. 

Consumer/Labour remained in the top-left quadrant of below-trend but improving growth. Consumer confidence has peaked on aggregate, although Germany finally looks to be past the worst after a tough period. The US labour market showed signs of reaccelerating on the back of a strong employment report, but the lack of spare capacity is keeping growth below-trend. 

Worryingly, global trade moved out of the top-right and into bottom-left quadrant, with both hard and soft data weakening again. In truth, global trade levels have been flatlining for the past six months, with mini-cycles around this trend. 

Industrial Orders continued to lag, failing to support the modest pick-up in manufacturing surveys as they fell into the bottom-left quadrant of below-trend and decelerating growth. Japan's sales-to-inventory ratio is in freefall, with US durable goods giving a similarly negative signal. The one bright spot is in Europe, where Germany’s foreign orders look to be consolidating their rebound despite a weak domestic picture.

Positive drivers despite abundant global risks

Global monetary conditions have eased significantly. Developed market sovereign bond yields plunged by a similar magnitude to 2007-09 during this year’s trough, with the Federal Reserve now aggressively expanding its balance sheet yet again. Almost every major emerging market central bank has lowered rates this year, many after painful tightening in 2018. This will boost growth, albeit with a lag. 

Meanwhile, Chinese policy has been measured but supportive, both in fiscal and credit, with deleveraging ‘on hold’ after the 2018 credit crunch that smacked domestic growth.

Global risks are abundant. The US-China trade war is not going away, even if ‘peak uncertainty’ has been reached. A ‘mini-deal’ could be forthcoming but seems increasingly unlikely before January, given recent Trump rhetoric. Indeed, any deal is unlikely to address the vast majority of contentious structural issues, keeping the truce uneasy and economic uncertainty intact. 

However, China’s resilient PMIs and the fact that previous US-China tariffs have thus far failed to knock the FLI off course suggest that the global growth recovery has other overriding factors. Elsewhere, the fast-fading boost from prior years’ US fiscal policy, against a mature credit cycle, tight labour markets and growing US election uncertainty, suggests that the US will continue to slow. The grind higher in oil prices will also prove a modest drag on activity. Moreover, the lack of spare capacity in many countries’ labour markets, and more limited scope for easing in many major economies, means any cyclical upswing will be more muted than recent history.

Past its worst

Overall, the FLI overall points to global growth being comfortably past the worst, with this continuing in the first quarter of 2020. However, the FLI seems to be plateauing at growth levels just half of the 2012-13 and 2016-17 upswings’ respective peaks. Moreover, beyond the first quarter of next year, the FLI seems to be turning less sanguine on the prospect of continued improvement, suggesting a limit to any upswing in corporate earnings.

Ian Samson

Ian Samson

Portfolio Manager