Sticking to my guns

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Union Jack EU flag Big Ben

I have been getting quite excited recently about the latest economic indicators globally. It happens occasionally. Normally, some of my colleagues make clear to me that I should calm down. So far, that hasn’t happened. There can only be two reasons why they haven’t. First, they may fear my bad temper and all hope that someone else will try to bring me to my senses. The other possibility is that they actually agree with me. I don’t want to speculate which possibility is more likely.

Brexiteers are undoubtedly inclined to say “I told you so, Brexit does not harm the UK economy”. Han de Jong Han de Jong Chief Economist

In a meeting I recently attended externally I was asked whether I thought my optimistic view was consensus or not. I said I didn’t think so, but the reply was that the equity market certainly seemed to be assuming a similar pattern of the global cycle during the period ahead. It is always difficult to assess what the consensus view is. And often the consensus view among economists and analysts can differ from what is being priced in in financial markets.

Eurozone PMI strong; catching up with Ifo?

So what can be read in the tea leaves of economic data presented in recent days. Nothing new, really. More of the same: strong confidence data and strengthening global trade.

20170227-Eurozone producer confidence 1

The composite PMI for the eurozone showed significant strength in February, jumping from 54.4 to 56.0, particularly due to a strong rise in the services sector. The German Ifo index of business confidence in the country rose also, but much more modestly, reversing the drop registering in January. While these two indices measure something different, they are highly correlated. The graph shows that the sharp increase in the PMI means that that indicator is catching up with Ifo which had risen more strongly last year.

20170227-US producer confidence

US PMI diverting with Philly Fed

The picture from recently published business confidence data in the US is slightly different. US PMIs eased somewhat in February with the composite index dropping from 55.8 in January to 54.3 in February as indices for the manufacturing and for the services sector fell back. This is in contrast to the Philly Fed index published more than a week ago. While these two series are not perfectly correlated, the current gap is unsustainably wide and something will have to give in the months to come: either the Philly Fed index must come down sharply or the PMIs must move materially higher.

UK growth surprises positively – again

GDP growth in the UK exceeded expectations (again) modestly in Q4. Brexiteers are undoubtedly inclined to say “I told you so, Brexit does not harm the UK economy”. I am inclined to warn that it is far too early to tell. Brexit hasn’t happened yet. Negotiations haven’t even started. The only thing that has really changed is that sterling has depreciated sharply. The first effects are perhaps seen in the GDP numbers for Q4 as exports expanded by 4.1% qoq, while imports shrank by 0.4%. Gross fixed capital formation stagnated while expectations were for a modest rise. We must not read too much on a single data point, but weaker business investment is the channel through with the uncertainty over Brexit is expected to damage economic growth.

I have repeatedly written about the improvement in global trade and logistics towards the latter part of last year. The graph on Japanese trade shows that the positive trend has rolled in to 2017. Korean trade data show the same for February.

20170224-Japan Exports and imports

What’s the story?

This all still fits the narrative I have been providing for some time. A number of largely unrelated factors that had depressed global growth in 2015 and the first part of 2016 are disappearing or reversing, providing a meaningful tailwind for the global economy.

Just to recap, these supportive factors include the stabilisation and recovery of oil prices, the inventory cycle, strengthening of the Chinese economy at the margin, the completion of deleveraging in some areas, less austerity, low borrowing costs, the availability of credit, the absence of turmoil on financial markets, the strengthening of the IT cycle, the turn of the profit cycle, and perhaps some more.

None of these factors by themselves would be powerful enough to spur the global economy along, but together they are. The question now is how long these tailwinds will last and, should they ease, whether or not the economy has gained sufficient momentum to continue growing at a decent clip this year. For now, I do not see any reason to turn pessimistic.


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