The FLI Cycle Tracker has staged a recovery into the top-left quadrant - meaning three-month growth is still below-trend, but is now accelerating. The picture is mixed across five underlying sectors, most of which are signalling positive acceleration.

However, the year-on-year reading appears rather sticky around its trough. While it’s only two-thirds as bad as the 2009 low, we may find ourselves stuck there for a long time, given limited scope for wider reopening or income support.

The FLI quantitative ‘bet’ has moved to become positive on risk for the first time this year, near the 50thpercentile of history.   

All five sectors have shown an impressive improvement from last month, except for industrial orders. Two out of five sectors have moved into the top-right quadrant, implying growth above trend and accelerating, while one has improved into the top-left corner for faster growth below trend.

Business surveys have shown the most spectacular recovery, with sentiment improving globally. New orders are rising relative to inventories, and both manufacturing and services PMIs have bounced back robustly. Europe bellwether surveys have also improved, albeit to a much lower degree. 

Global trade has moved into the top-right quadrant, with economies reopening and global exports bouncing back in July. Commodities saw some amelioration, thanks to normalisation in ship freightage costs.

Among the laggards is the consumer and labour sector, which remains stuck in the bottom-left corner. Consumer confidence has stayed depressed across the globe, with potential second/third waves and job losses on people’s minds. For the labour market, hard data remains worrying but there has been improvement in the US unemployment claims and overtime hours worked. 

The weakest FLI sector is industrial orders, which, mired in the bottom-left quadrant, has barely improved from the last reading. The weakness is felt globally, with Japan’s inventory-to-sales ratio hitting its all-time nadir and struggling to improve. German foreign orders and US inventory-to-sales ratio are also weak.

The FLI has followed higher-frequency data in a rapid recovery following Q2 lockdowns, driven by reopening and income support. Worst-case scenarios, easily imagined just a couple of months ago, have been largely avoided in developed markets.

However, the FLI still points to very weak underlying growth, and depressed consumer components remain a concern. Until there is a vaccine, most major economies will likely stay below their growth potential to lower the risk of renewed, significant virus outbreaks. That said, on the positive side, it seems that localised and far less draconian lockdowns may be all that is necessary to deal with inevitable flare-ups.

As such, the true economic damage is likely to become clear throughout the second half, as income support programs taper. Towards the end of 2020, data should offer more clarity and help us gauge the longer-lasting ‘hysteresis’ effects from this downturn, and the extent to which the global economy will struggle to recover, even with the potential help of an effective vaccine.

Louise Fribourg

Louise Fribourg

Tactical Asset Allocation Analyst

Ian Samson

Ian Samson

Portfolio Manager