Global equities and other risk assets ended last week near to their high water marks for the year. Once again, markets have reacted favourably to the most important indicators for global activity, all of which have been published in the past week.
There have been some signs that higher oil prices have dampened consumer spending in the US, and the global industrial sector has given further evidence of reaching its peak growth rate. But so far any slowdown has been very minor, and not enough to persuade markets that this is anything more than a temporary correction.
In my regular weekly round-up this week, I will comment on the implications of recent data for the major economies.
1. The United States
This is definitely a mixed bag. On the strong side, the labour market does now (at last) seem to joining in the wider economic recovery. The rise of 230,000 in private sector jobs in March compares with an average monthly gain of 147,000 jobs since last summer, and the drop of 0.1 per cent in the unemployment rate was again encouraging.
True, about two-thirds of the recent fall in unemployment has been caused by a drop in labour force participation, but that still leaves one third stemming from genuine economic expansion. Furthermore, hours worked and personal income are growing nicely.
On the weaker side, consumers’ expenditure in 2010 Q1 has been far less robust than in the previous quarter. Consumer confidence has clearly been dented by the rise in gasoline prices, though the extent of the drop in confidence seen so far has been very minor compared with the collapse which occurred during the financial crisis. The main problem in Q1 has been the acceleration in price inflation, which has eaten into disposable income, and left real consumption rising by only about 1.5 per cent (annualised). This could leave real GDP growth in Q1 at only around 2 per cent, much less than was expected until recently. Some of this disappointment is probably due to bad weather in January.
The ISM survey for the manufacturing sector in March fell fractionally to a balance of 61.2. This was still clearly higher than the Q4 reading of about 58, suggesting that the underlying growth rate of the economy has remained robust, despite the weather and rising oil prices. However, the much-watched ratio of new orders to inventories fell markedly this month, suggesting that growth in the industrial sector has passed its peak.
2. Europe
The PMI survey data for most European economies in March was rather similar to that in the US. The headline readings remained at high levels, but were slightly lower than in previous months. In the UK, the drop was larger than elsewhere, which is a bit worrying since the manufacturing sector is meant to be the strongest part of an economy which is clearly weakening elsewhere, notably in retailing.
A more encouraging feature of last month’s numbers was that the strength of Germany’s recovery (confirmed again in the latest labour market data) now seems to be spreading to the rest of the Euro area, even including some of the troubled peripheral economies which are beginning to emerge from the doldrums.
The next test for Europe will be whether the economy can withstand the tightening in ECB policy which is universally expected to begin on 7 April. It probably can.
3. Japan
Economists have become more concerned about the impact of the tragic earthquake and tsunami on the economy. Although the headline PMI for March fell only by 6 points to around 46, many of the statistical returns which did not arrive this month were probably much worse than this.
Economists at J.P. Morgan, in line with others, now see industrial production dropping by 12 per cent (not annualised) in March. Real GDP has been revised downwards by most forecasters as they have been able to come to terms with the extent of the damage wrought by the natural disasters.
A reasonable guess is that annualised GDP growth in Q2 will be around -4 per cent, with a sharp rebound being likely in the second half of the year. There have also been increased concerns about the supply-side impact of the loss of Japanese-produced components which are needed to maintain production in other economies, especially in Asia. The generalised hit to Asian production in Q2 could surprise markets when it comes.
4. China
Regular readers will be aware that I believe that the Chinese economy is farther advanced into its economic slowdown than has been generally realised. The March PMI data were slightly better than in the previous two months, but there is normally a strong seasonal bounce in the spring, which makes the figure suspect.
Tighter policy is definitely now biting. The key question is when this will satisfy the authorities that inflation pressures in the economy have been brought sufficiently under control. My guess is that it will take a few more months before food price pressures peak, and the phase of policy tightening can end.
5. Conclusion
Overall, the global activity data have been much more mixed in March than in the previous six months, when there was strong upward momentum in all economies except China.
As I have commented in previous blogs, the global economy has probably left its super sweet spot, in which spare capacity is being absorbed at an increasing pace. There is still plenty of spare capacity available, at least in the developed economies, and underlying growth is still probably above trend, but the growth rate is no longer rising. This is normally consistent with positive, but lower, equity returns.
Markets have this week taken the view that the world economy is easily robust enough to shrug off the oil and Japan-induced slowdown which is now underway. I think the markets are probably right, but only if the oil price stops rising soon.
