Overall the FLI is still signaling global growth is below trend and decelerating. This suggests global activity is on course for further deterioration but may stabilise earlier than previously thought.
Of the five sectors that make up the FLI - global trade, business surveys, industrial orders, commodities and consumer/labour - only consumer/labour has managed to break into the top-left quadrant, which indicates growth is improving but still negative.
Source: Fidelity International, April 2019.
It is possible that the recent improvement in the FLI is the first sign that the global economy’s negative momentum is starting to ease. However this is far from certain and we have witnessed too many false dawns over the past year to be confident in this one just yet.
Positives and negatives
On the positive side, US and China policy action should begin to provide support for the global economy. China’s credit data improved last month and Value-Added Tax (VAT) cuts, the bulk of China’s stimulus, came into force in April. Despite the weak momentum coming into 2019 and lingering questions over the effectiveness of stimulus, we will feel confident in this pick-up if it extends into the latter half of the year.
In the US, the Federal Reserve has scrapped its rate hike plans for this year and suspended its quantitative tightening plans. We expect these actions to begin feeding into global growth by next quarter.
On the negative side, the timing of the improvement in Chinese data feels premature given the recency of the VAT cuts. The Fed’s pause is still relatively small in magnitude, while fading fiscal stimulus and prior rate hikes in the US are still acting as a drag on the economy. Moreover, oil prices are steadily grinding higher due to supply constraints and may represent a further headwind to global growth later in the year.
It is still too early to say if 2019 will bring a real and meaningful reacceleration or more subdued growth and disappointment. Data in the next few months should reveal the direction of travel. This crossroads in the FLI suggests a neutral stance on risk and duration is appropriate for now.