Some grit in the GEARs persists, especially in Europe and some emerging markets (EMs), but the global economy has yet to grind to a halt.  

Source: Fidelity International, July 2019

US and China hold up overall

The good news came from the biggest economies. The US ticked up, looking broadly stable if noisy, after the slowdown seen around the turn of the year. The US is perhaps overly dependent on the consumer components of the gauge, but there are no major concerns at the headline level - at least for now. More importantly, China seems to be holding up overall, despite mixed underlying components. Its GEAR is well above the lows seen earlier in the year, perhaps thanks to effects from its stimulus seen so far this year.

Eurozone edges downward

It was a different story for the Eurozone GEAR, which overall edged down to marginal new lows, consistent with a slow start to Q3 (at a similar pace to the weak GDP print for Q2). Trade-sensitive European economies such as Germany, Switzerland, Sweden, the UK and suddenly even Emerging Europe experienced sharp plunges and saw their GEARs flirting with contraction. Italy ‘lost’ the title of the weakest Eurozone GEAR to Germany, which is yet to halt its extended downtrend.

The question European investors are asking themselves has gone from: “Is this as bad as June 2015?” to: “Is this as bad as March 2012?”. And soon, the question may be not “has the slowdown nearly run its course?” but “does the European Central Bank have sufficient firepower left to counter deflationary forces in the Eurozone?” Given reports that Germany is considering moving away from its balanced budget policy, we could now see greater emphasis on fiscal stimulus in conjunction with expectations for further quantitative easing.

UK in reverse

The UK GEAR has dropped, suggesting the economy may struggle to rebound after its Q2 contraction, especially as we near the 31 October deadline for leaving the European Union. Most stark is the collapse in imports as sterling weakens, although some of this is payback from the ‘front-loading’ previously seen ahead of March’s potential Brexit date. 

Mixed picture for EM

EM GEARs were more of a mixed bag, but there is little outright positivity yet. Mexico and Brazil are in the crosshairs of previous US tightening and China slowing, with their GEARs suggesting recession is possible; although Mexico at least has finally managed to embark on a domestic easing cycle after several painful years. Korea’s GEAR is heading back towards its multi-year lows. South Africa is the lone bright spot, with our GEAR for that country showing a particularly strong recovery after Q1’s contraction, despite still high unemployment and financial troubles at its state-run utility Eskom.

Recession or stabilisation?

Looking at the overall GEARs picture raises the question as to whether the ‘big gun’ economies such as the US and China will drive the world back towards a more stable path, or whether the ‘little guy’ economies are the better indicators of what lies ahead. On the one hand, it could be argued that the data is backward-looking and we are about to feel the pinch of some more (since dialled-back) tariff escalation. On the other hand, central banks are firmly on an easing path and we are even further into the cycle of plunging bond yields. Absent any unexpected inflation, this should be positive for global growth and the corporate sector, even if it’s less clear when those effects will fully come through.

Ian Samson

Ian Samson

Portfolio Manager

Jeremy Ocansey

Jeremy Ocansey