Global Growth Report Card, June 2015

According to Fulcrum’s “nowcast” factor models, global economic activity has improved significantly in the past month, with data from China and Japan recording stronger growth than has been seen for some time.

The eurozone remains fairly robust (if only by its own rather unimpressive standards), but the US has failed so far to bounce back from a sluggish first quarter, even after the strong jobs report last Friday. There have been further downward revisions to forecasts for US GDP growth in the 2015 calendar year, including notably by the International Monetary Fund. This will be yet another year in which US growth has failed to match the optimistic expectations built into consensus economic forecasts at the start of the year.

Despite some lingering doubts about the US, the improvement in global growth this month has significantly reduced the tail risk that the world might be heading towards a more serious slowdown. The reduced risk of a more severe global slowdown, along with signs of a bottoming in headline inflation in most economies, has probably been a factor behind the sell-off in bond markets in recent weeks, as the perception of global deflation risks has faded.

The regular proxy for global activity that we derive from our “nowcast” factor models (covering the main advanced economies plus China, see graph on the right) shows that activity growth is now running at 3.5 per cent, which means that the slight dip in the growth rate that we identified around March/April has now been eliminated. Although the “recovery” in growth is only around 0.7 per cent from the low point, it is nevertheless significant because it suggests that the risk that a hard landing in China could drag the world economy into a more severe downturn has diminished, at least for now. Read more

he oil price has fallen by more than half in a little over six months, and you might expect investors to be cheering. Perhaps they would have been — had the result not been a precipitous drop in inflation.

A flight to the safety of government bonds has caused yields to fall lower than they have been at any time other than the darkest days of the euro crises of 2012. Although stock markets are still only 3.5 per cent from their all time highs, they have become a lot choppier. Prices are bouncing up and down, suggesting investors have become more nervous about the prospects for economic growth. Read more

The recent buoyancy in global equities has raised fears that the markets have entered a major bubble, driven by the unprecedented expansion in central bank balance sheets.

To the extent central bank asset purchases have reduced government bond yields, they have certainly brought forward returns from the future into the present, thus reducing expected returns on both equities and bonds. But this is normal in a period of monetary easing, and it does not automatically mean that markets are in a bubble. Read more

The month just ended was the fourth worst month for government bond returns in the past two decades. This abrupt response to Ben Bernanke’s warning that the Fed might think about tapering QE at some point in the next few meetings has naturally raised fears that the great bull market in fixed income, which started in 1982, might now be threatened by a sharp reversal.

Some analysts regard this as the inevitable bursting of a bubble which has been created by the actions of the central banks (see this earlier blog). Others, like Jim O’Neill, regard the rise in bond yields as the start of a return to economic normality, and argue that would be a very good thing as long as it occurs in an environment of recovering economic confidence. Paul Krugman also points out that the pattern of behaviour in the major markets – bonds down, dollar up and equities up – is consistent with greater optimism about the US economy, rather than worries about the Fed or the onset of a debt crisis. Read more

Jens Weidmann, President of Bundesbank

Jens Weidmann, Bundesbank president. (c) Tim Wegner

There was a time, before the existence of the euro, when the financial markets hung on every syllable uttered by the president of the Bundesbank. Not only was the German central bank the most respected institution in global finance, it was a founder member of the awkward squad, and was frequently willing to stare down politicians, no matter what the temporary costs in market turbulence. Macro traders, who were routinely dismissive of public officials throughout the world, never found that it paid to be dismissive of the Bundesbank.

Since monetary union, the Bundesbank has lost some of its lustre, which is inevitable given that its president now has only a single vote on the ECB’s 23-member governing council, the same as the head of the central bank of Cyprus. However, this week it has been just like old times, with Jens Weidmann, president of the Bundesbank, setting the entire agenda for the financial markets with his FT interview on November 13, in which he appeared to torpedo hopes that ECB bond buying would soon become open ended in order to support the new government in Italy. Mr Weidmann not only argued that such buying would be inadvisable, he went as far as to claim that an unlimited extension of the SMP to hold down bond yields would be illegal, which is another matter entirely. Read more