The weakness in global risk assets that started in May 2015 raises a major question for macro-economists. Is market turbulence foreshadowing – or perhaps causing – a much broader weakening in global economic activity than anything seen since 2009?
Until now, the Fulcrum activity nowcasts have failed to identify a major turning point in global growth. This conclusion is still just about intact, but is subject to much greater doubt in this month’s report. There are some signs that growth in the advanced economies may be fraying at the edges, and China may be embarking on another mini downturn.
The growth rate in global activity remains broadly unchanged at around 2.8 per cent, little different from the rates recorded since mid 2015. However, there has been a further slowdown in economic activity in the advanced economies (AEs), which are growing at only 1.2 per cent, down from 1.6 percent late last year.
For the first time since 2012, the growth rate in the AEs is clearly below trend (estimated at 1.7 per cent). Furthermore, the US nowcast is now at its lowest since the recovery began in 2009.
The nowcasts have warned of a noticeable slowdown in the US for many months, and they continue to suggest that American activity is expanding at only about 1.2 per cent, little changed from the 2015 Q4 estimate.
Until now, however, this drag on global activity has been offset by fairly robust growth rates in the Eurozone. Worryingly, Eurozone growth has now sagged to about 1.3 percent. Although this remains above the US growth rate, it no longer provides a strong counterpoint to American weakness, according to the models.
This development reduces our confidence that the bout of American weakness in the industrial sector will be easily shrugged off by the global economy. Significant downgrades to consensus forecasts for US growth in 2016 now seem very likely. Although the risk of an outright recession still seems contained, the Fed must surely sit up and pay attention to this.
We judge that there has been little change in overall activity in the emerging markets this month. The China nowcast has moved down to the lower end of its recent range, but there are clear signs of stabilisation in Brazil – by far the weakest of the G20 economies last year – and an up-tick in growth in India.