Is the good news for the economy a sign of things to come?
Spring beckons for the global economy?
Not one, not two, not even three! No less than four bits of good news on the global economy have broken in the last few days. Should we sound the trumpets? Start the street parties? Should we start playing Cliff and saying to policy makers: ‘Congratulations?’ Or are we seeing a temporary respite, and what about equities?
Four pieces of good news
- The latest Caixin purchasing managers index tracking Chinese manufacturing has risen to an eight-month high.
- German industrial production rose by no less than 0.7 per cent in February, on the month before.
- US non-farm payrolls saw a 196,000 increase in March, after a lacklustre February which saw a mere 33,000 rise.
- UK GDP expanded at a respectable 0.4 per cent in Q1, that’s quarter on quarter. The UK is not exactly booming, but it is far from recession pace — recent purchasing managers indices had pointed to a much slower growth rate.
Neil Shearing, Group Chief Economist at Capital Economics, said: “Taken together these are encouraging developments and certainly make a pleasant change from the run of increasingly gloomy data released since the start of this year.”
Sorry about the above, sorry if I got you reaching for the bubbly, you know there is going to be a catch and alas I have four of them.
- While the purchasing managers index for China was encouraging, the index has been boosted by construction, forward looking indicators, such as data on land purchases, suggest that this may be as good as things get, at least for a while. The Chinese economy has been propped up by government spending for some time, this factor may be diminishing.
- The jump in German industrial production seems to have been largely down to a one-off surge in construction, supported by unseasonably good weather. In fact German manufacturing contracted.
- While the US saw a much improved rate of job growth in March, the three month moving average is at a 15-month low and growth in average hourly earnings fell sharply in March to just 0.1 per cent.
- The UK economy seems to have been boosted by stock-piling, ahead of fears that the UK could crash out of the EU. By contrast, the latest purchasing managers index for UK services fell to just 48.9 in March, pointing to contraction. It was the first time the index had been below the critical 50-no change level since July 2016.
Neil Shearing added: “Claims that the world’s major central banks have saved us from a synchronised global downturn and that the scene is now set for a revival in growth feel premature.”
No sign of a recession
Clearly, the global economy is a long way from booming, it’s even a long way from doing okay, but none of the data points to a recession.
The latest market report on the UK economy projected growth of 0.8 per cent this year, weak but above recession pace. I worry about other data showing that UK business investment is at a ten-year low, but some of the reports rattling around warning of imminent recession seem to be overdone.
As for Brexit, I don’t think the UK will leave the EU. I think there will be another referendum, a chastened millennial generation, who stayed away from polling booths in the last vote, will vote in big numbers, many previous Brexit voters will vote for Remain, and the Remain vote will get a resounding yes — approaching 60 per cent. The UK and to a lesser extent, the global economy, will heave a sigh of relief, growth will rise for a bit, before other pressures come to bear, and things go back the new normal which is the 21st century economy — until the fourth industrial revolution starts boosting GDP, at some point during the middle of the next decade.
The recent reversion of the yield curve — meaning the yield on ten year US Treasuries fell below the yield on two-year US Treasuries, remains a worrying sign.
Earlier this week, Capital Economics said: “Equities in the US have continued to rise in the past month, but the recent inversion of parts of the Treasury yield curve and weak economic data doesn’t bode well for the US stock market. We forecast that the S&P 500 will fall sharply over the rest of this year as growth in the US economy disappoints.”
I find it hard to disagree.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees