The first week of market trading in the new year has seen alarming declines in risk assets – the largest early January falls since records began in some markets. This outbreak of bearishness has no doubt been driven by further falls in oil prices and the weakness of the renminbi, both of which could lead to major financial dislocations across the world. But a really large bear market in global equities and credit is unlikely to take hold unless and until there is a major weakening in global economic activity.
So far, our regular monthly “nowcasts” of economic activity, which are updated in full here, have not picked up any decline in global growth, compared to the average recorded in recent quarters.
The overall growth rate in global activity is now running at roughly 3 per cent, which is actually slightly higher than than the growth rate recorded in 2015 Q3, the date of the previous global market scare. This conclusion is strengthened by the latest industrial production data, which show that the global IP growth rate has rebounded to about 2 per cent, compared to -2 per cent about a year ago.
The results for individual countries this month do not support widespread fears of a hard landing in China, but (surprisingly) they do identify a progressive slowdown in the US. This would become worrying for markets if it persisted into 2016 Q1, especially if it continued to be ignored by the Federal Reserve.
European growth remains robust (by its own tepid standards). In fact, the large gap in activity growth between the eurozone and the US is unusual, and is counter to the recent changes in monetary policy in the two blocs. This growth pattern needs to change in coming months if the Fed/ECB “divergence” in monetary policy is to take its expected course this year. Read more