22 October 2019
US falling back, China brighter and emerging markets show no clear pattern
The US fell back to levels of growth seen around 2016, although this is still in positive territory and above many other developed countries. Business surveys suggest there is a further slowdown to come, if the hard data follows suit. Indeed, the overdue ‘consumer catch-down’, where consumer data converges to the data seen globally, appears to have started - retail sales are back at trend levels after a very strong patch. Offsetting this is the real estate sector, which has benefited from plunging mortgage rates that support the GEAR.
China is looking brighter. Its GEAR edged up yet further and sits well above the lows of the fourth quarter of 2018. China’s magnitude of stimulus is enough to stabilise the domestic economy, but it doesn’t have the power to reflate the rest of the world. While China is in stable expansion there is no clear trend in the rest of the emerging markets.
Brazil is edging higher after its economy avoided a technical recession. Mexico has dropped further into contraction. South Africa is failing to build on its Q2 recovery, and continues its aggressive zig-zag pattern that leaves the economy flatlining overall. Turkey has managed to bounce out of contraction.
Euro area more benign that it seems
A pessimist would point to our eurozone GEAR as a bellwether, signalling the direction of the global economy. The eurozone GEAR has abruptly broken down to new lows and is barely in expansion, driven overwhelmingly by Germany, where the GEAR is in contraction after almost two-years of straight-line deceleration. However, France, Italy, Spain, Sweden and Switzerland all have GEAR readings above the eurozone aggregate figure, showing a far more benign picture than the headline eurozone GEAR would suggest.
Elsewhere in developed markets, the picture remains soggy. The UK GEAR ticked back down, but Q3 should show a marginal expansion after the previous quarter’s GDP contraction. Japan’s GEAR edged down and remains contractionary, implying that that H1 GDP growth overstated the strength of the economy.
Weak footing but not outright gloomy
In aggregate, the global GEAR is not excessively downbeat, but does suggest that the global economy remains on a weak footing. Before next month’s GEAR readings, we’ll be keenly watching flash PMI data. Most importantly, we’ll be looking for signs of a long-overdue bounce in eurozone activity and whether the US survey slowdown has troughed. Given the stimulus from dramatically falling global bond yields, there could be a path to renewed animal spirits if the PMI data is positive and there is a US-China trade truce. But any further falls in global activity data would be sobering for investors and could presage a bleaker outlook.
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