Source: Fidelity International, June 2019
Too good to ignore
This month’s improvement in the FLI cycle tracker to the ‘top-right’ quadrant of growth positive and improving is too good to ignore. No sector is in the ‘bottom-left’ any more, compared to all five in February. This suggests that a good part of the latest recovery has been flattered by very easy quarter-on-quarter comparisons, after an abysmal start to this year, as distortions around the timing of US-China tariffs ‘kitchen-sinked’ global activity.
Two sectors are in the top-right quadrant and, of these, global trade has been the biggest contributor, driven by notable bounces in both hard and soft data. Consumer/labour also moved into the top-right quadrant, albeit marginally. Components remain mixed, with US data weakening, a trend echoed elsewhere in the FLI.
Rebound in growth
The other three sectors are all in the ‘top-left’ quadrant of growth below-trend but accelerating. Business Surveys continue to show signs of stabilisation, at soft levels. The global new orders/inventories ratio seems to have stabilised, after more than a year of deceleration.
Bellwether Eurozone surveys are also perking up after a poor run, countering the fall seen elsewhere in US data. Industrial orders have rebounded, particularly in Germany, reinforcing the business surveys. Japanese data is finding a foothold, to a lesser extent.
Commodity-linked components have also bounced back and are now in the top-left quadrant, somewhat at odds with still-weak spot prices. This improvement has, at least in part, been driven by dislocations in global shipping rates after the Brazilian iron ore disaster.
Considering the key global growth drivers, it is not a surprise to see a bottoming out in global growth after a very weak turn of the year. That said, it is too early to have confidence that we are returning to particularly strong growth rates. Only half of the individual FLI components actually showed above-trend growth. Moreover, the FLI disguises divergent global growth trends, as the US continues to slow from good levels while other economies look to bottom out.
There are positives - US monetary conditions have now eased, after over-tightening with respect to the global economy last year. While the all-important US Dollar remains surprisingly strong for now, emerging market forex has still been broadly stable, which is key to global growth. Chinese policy has been surprisingly supportive year-to-date, a complete reversal of 2018’s tightening, which will feed into domestic and global activity with a lag.
But it is not all good news. The US slowdown looks set to continue. Fiscal boost is turning to drag, while business confidence has been falling for months, reinforced by elevated US corporate leverage. Renewed US-China tariff escalation is a drag but must not be overemphasised as a driver of growth in either economy - and certainly not the rest of the world. The short-term disruption and hit to sentiment will delay and dent, but is unlikely to derail, global stabilisation. This is contingent on escalation remaining confined to US-China; the latest US truces with Mexico and Europe are positives here.