The global business cycle: for better or worse?

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Global growth has disappointed for a long time and growth forecasts have generally been revised down for an equally long time in a large number of countries. Financial markets have responded accordingly. But a range of financial market indicators that are sensitive to the global business cycle have been improving since the end of February. Commodity prices have recovered and high-yield spreads have narrowed, for example. The question is if this is a ‘dead-cat bounce’, perhaps encouraged by loose monetary policy in Europe, Japan and China, or whether this is signalling a genuine improvement in cyclical conditions. In case of the former, cyclical and risky assets will run out of steam and correct. In case of the latter, the rally in these assets will prove to be sustainable.

Even at the best of times, global economic indicators paint usually paint somewhat mixed pictures. Rarely do all indicators point in the same direction. Han de Jong Han de Jong Chief Economist

  • Commodity prices and cyclical assets have recovered since late February, but what does that signal?
  • Is this the result of the earlier decline having gone too far or does it signal an improvement in global cyclical conditions?
  • The evidence is mixed, but we think it weighs in favour of an improving outlook.

Mixed signals, almost always

Even at the best of times, global economic indicators paint usually paint somewhat mixed pictures. Rarely do all indicators point in the same direction. And when they do, you can be sure that the information contained in such a pattern is completely discounted by financial markets. The job of an economist is to go through the data and weigh up the evidence.

I think there is reason to be cautiously optimistic. Business confidence indicators are important cyclical signals. They have generally disappointed somewhat in April. But they had, to a larger degree, surprised positively in March. As Easter was early this year, 27 March, the data for March and April must be averaged a little. The picture that emerges is modestly positive.

European car sales

The eurozone economy has grown more strongly in Q1 than was expected. Even if this was flattered by mild winter weather and some pay-back may occur in Q2, the underlying trends remain favourable. Car sales in the EU are strong. They were up 9.1% yoy in April. The number for the eurozone was even 9.8%.

European car sales 

Weak production, stronger orders

Industrial production was weak in the eurozone as a whole and in Germany, but German orders were strong in March. That was particularly true for foreign orders, especially orders from Non-eurozone countries. This is an important indicator as Germany is a giant exporter so its export orders are an important indicator for the direction of the global cycle.

Weak production, stronger orders

China new initiatives

Chinese leaders announced a three-year programme recently for infrastructure spending amounting to almost 2% of GDP per year. Unfortunately, it is not clear, at least not to me, if this spending was already included in earlier announced plans or if it is additional.

Nevertheless, the intentions of the Chinese leaders are very clear. They will not tolerate a sharp slowdown of economic growth at this stage and will resort to old-school stimulus if they feel they have to. This is positive for the short-term outlook, but obviously casts some doubt over their commitment to transform their economic growth model based less on exports and construction and more on services and domestic consumption.

Chinese policymakers had earlier boosted activity by monetary and lending policies. The combination of fiscal and monetary stimulus should prove quite effective. While the bigger picture for China remains one of gradually slower overall growth, the near-term outlook is encouraging.

US consumer waking up from hibernation

US retail sales surprised on the upside in April, growing by 1.3% mom. While this was partly due to higher energy prices, the growth rate for the so called ‘control group’ of retail sales amounted to 0.9% mom. These are welcome numbers as the US consumer looked to have gone into hibernation. Consumer spending had grown at a disappointing pace in recent months despite favourable income gains. If the strong April numbers are sustained, the near-term cyclical outlook for the US economy is certainly positive.


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