Mixed sectors

Sector developments have been mixed, with three of the five improving, while two worsened. The good news is that all five sectors are now showing positive acceleration.

The most notable detractor was Global Trade, which gave flat readings on both growth and acceleration. Both hard and soft data suggest that global trade is once again flatlining, following a rebound after the first quarter ‘air pocket’ that was created when inventories built ahead of the apparent January deadline for US-China tariff escalation. We can now expect similar dynamics ahead of September’s scheduled tariff increase. 

Consumer/Labour components continued to weaken, although consumer confidence is holding up in many economies, notably the US. However, the significant slowing in US hours worked is concerning. 

Business Surveys and Industrial Orders are faring better with Germany’s new foreign orders recovering from the lows, despite negative headlines on industrial production.

Commodities is the most supportive sector, and the only one with above-trend growth taking it into the top right of the chart. A resurgent Baltic Dry Index and stabilising survey data are the drivers. 

Source: Fidelity International, August 2019

Plateauing global growth

Global growth looked set to plateau at positive but below-trend levels, comfortably above its lows. But given mixed and unusually volatile underlying indicators, it is too early to say that the global economy has truly reached ‘escape velocity’. The key question is whether, once the potential damage and near-term distortions of next month’s scheduled US-China tariff hike settles, the nascent trend of improvement will continue. 

On balance, given that tariffs are still confined to relatively small portions of only the US and Chinese economies, global growth may at least remain stable. Global monetary conditions are now easing significantly. The US Federal Reserve has cut rates and ended ‘quantitative tightening’. Expectations of easing from the European Central Bank have driven global bond yields yet lower. A majority of emerging market central banks have now started to reverse last year’s rate hikes, some aggressively. 

As important, Chinese policy has been surprisingly supportive year-to-date; China’s credit impulse has turned significantly positive, which should provide support to activity by year-end, even if multipliers are likely to be smaller than in the past. Moreover, oil prices are well off their highs, below the 2018 average, with any drag thus fading. 

Far from recession

Overall, the FLI suggests that we are far from a global recession, even with the impending tariff escalation. The quantitative ‘bet’ is consistent with bond yields rising from current, pessimistic, levels. Risk assets look supported, but vulnerable to soft growth rates. 

Ian Samson

Ian Samson

Portfolio Manager