Chinese retail sales came in below expectations in February © AFP
Whisper it quietly: is the global economy starting to splutter?
Although wage growth remained solid, last Friday’s US employment numbers came in sharply below expectations, dampening concerns that the Federal Reserve could accelerate its interest rate increase plans. Perhaps more worryingly, the jobs data miss fits a broader, global pattern of economic data undershooting expectations this year.
Despite the healthy employment picture, US retail sales unexpectedly fell in January and fell short of forecasts in February. European and Chinese retail sales also came in below economists’ expectations in February, and purchasing managers’ indices have weakened almost everywhere.
Given that investors are already growing increasingly nervous about escalating trade tension — global equities have tumbled by more than 8 per cent from their late-January peak — the bout of disappointing economic data could not have come at a worse time.
“Last year it became apparent that global growth was accelerating, but there are now reasons to believe that the acceleration phase is over,” said Larry Hatheway, chief economist at Gam, an asset manager. “It might not be decelerating yet, but markets trade on inflection points.”
In fact, Citi’s global Economic Surprise Index — which measures how often data come in above or below expectations — has sagged precipitously this year, and is now back in negative territory. Although the gauge is mean-reverting by design, Goldman Sachs’s global “current activity indicator” also weakened notably in March, and a record 74 per cent of fund managers polled by Bank of America last month said that the global economy was now in its “late cycle”.
A smattering of other informal but popular market gauges of the global economy are also looking a little wan. The price of copper has dipped almost 8 per cent this year; the Dow Jones Transportation Average has fallen over 10 per cent since its January high; and the stock of SKF — the Swedish maker of ball-bearings that are used in a panoply of industrial products — has declined more than 14 per cent since mid-January.
Andrew Kenningham, chief global economist at Capital Economics, estimates that international growth actually accelerated to 3.5 per cent in the first quarter, up from a 3.2 per cent annualised rate in the fourth quarter. But in a note to clients last week he warned that this could be the peak for the global expansion.
“The weakness of some recent economic data and business surveys has raised concerns that the global expansion is running out of steam,” Mr Kenningham said.
Stephen Jen, a hedge fund manager at Eurizon SLJ Capital, thinks the recent turbulence might even be the beginning of the end of the bull market. He argues that the “calm the world has enjoyed was the result of Herculean policy efforts that will have negative consequences in the quarters ahead. The calm will probably be followed by a storm, just as Goldilocks was eventually chased out by the Three Bears.”
However, aside from a few bears, there is mostly a murmur of concern rather than widespread fear. Global economic data might be coming in a tad below expectations lately, but that in part also reflects how analysts had been raising their forecasts — which is what Citi’s surprise indices reflect. Aside from the possibility of trade wars, strategists largely say there is little on the horizon that could derail the global economy.
“It’s on my list of things to worry about, but it’s a long list,” Mr Hatheway at Gam said. “It’s hard to get overly worried about global growth right now.”
Robert Buckland, chief global equity strategist at Citi, argues that investors should still “buy the dips”, even if those dips will get bigger as the global economic cycle enters its final stage. John Normand, a strategist at JPMorgan, agrees that global equities now look oversold, and predicts that the upcoming corporate earnings season — which kicks off later this week — should assuage investor concerns. “Equities are looking oversold just as a very strong reporting season is beginning,” he argued.
However, this means it will be even more important than usual that corporate profits prove as healthy as expected, with investors likely to prove sensitive to any hints of broader economic malaise in the results.
Global earnings are forecast to have grown 14.6 per cent in the first quarter, and tax reform has lifted estimates of the S&P 500’s earnings growth to 17 per cent, which would be the fastest quarterly growth since 2011. But if results undershoot this high bar, then “fears about decelerating economic activity will compound mounting concerns around trade, regulation, and stretched positioning”, warns David Kostin, chief US equity strategist at Goldman Sachs.
“People are pinning a lot of hope on the first-quarter earnings season,” notes Jim Paulsen, chief market strategist at The Leuthold Group. Although he isn’t worried about a recession quite yet, Mr Paulsen frets that markets could take another leg down as more investors digest the fading growth outlook.
“We haven’t seen a full-fledged rush to safety yet, and that’s a reason why I think this could get worse before it gets better,” he said.
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