Overview
After a year of roaring recovery, we could now be heading for a stagflationary winter, according to the Fidelity Leading Indicator (FLI) cycle tracker. The FLI is a proprietary measure designed to anticipate the direction and momentum of near-term global growth, and is one of the tools we look at to evaluate risks. The FLI has moved into the bottom-left quadrant - a sign that growth has turned negative and may get even worse.
Region by region
In Europe, sharp falls in Eurozone and UK data, for instance September’s Purchasing Manager’s Indices, reflect supply chain difficulties, the spread of the Covid-19 Delta variant and growing pessimism among business leaders. Persistently high inflation readings add to the sombre mood, with the constrained supply chain, labour market shortages and rising commodity prices being the main drivers. Looking ahead, rising gas and electricity prices and fuel shortages could weigh heavily on the industrial recovery in Europe and the UK.
There was a more modest drop in US economic activity in September. Input costs continued to rise, with supply chain and material shortages again being the culprits. Nevertheless, US business sentiment has remained buoyant because companies have been able to pass on higher costs to end-consumers and recruit staff, albeit at higher wages. We expect the recovering labour market and consumer spending to support US growth for the rest of the year, although this is thanks in part to an extraordinary amount of monetary and fiscal stimulus. The unwinding of this support could be a drag on growth in 2022 and it remains to be seen if infrastructure spending can soften the landing.
China’s policy-induced slowdown has continued, most visibly in the property sector. Fears of financial contagion from distressed developer China Evergrande have further dampened real estate activity, with land transaction volumes down 65 per cent year on year and daily urban property transaction volumes 45 per cent below 2020 levels. We expect the government’s interventions will eventually set China on a path toward sustainable long-term growth, but there will be near-term costs caused by more regulation and government requirements. The combination of higher fuel prices and efforts to achieve emission targets may also lead to slower growth. All in all, the government appears willing to tolerate a considerable degree of short-term pain in pursuit of its long-term objectives.
Caution ahead
Heading into the final quarter of the year, ongoing supply chain disruptions, wage pressures, power crises and the adaptations required for net zero are likely to contribute to persistent inflation. Potential spillovers from China’s macro policy also present downside risks for the global economy and markets. These rising risks to growth, combined with more tenacious inflation, warrant a cautious outlook.
