London, July 2, 2017
Policymakers and economists seem to believe that the world is enjoying a broad expansion
So strong is the belief in the growth momentum of the global economy as it enters the second half of 2017, the point has been reached in the economic cycle where data not meeting expectations is dismissed as an aberration.
Flash purchasing managers’ indexes for services in Europe in June, for example, were weaker than anyone in a Reuters poll had predicted, but the market paid scant attention. “Way below expectations, but let’s not worry,” was the mantra.
Such economic Panglossianism — all for the best in the best of all worlds —is based on what seems to be a majority view among policymakers and economists that the world is enjoying a broad expansion.
“Faster growth this year reflects a synchronised improvement across both advanced and emerging market economies,” Brian Coulton, Fitch Ratings’ chief economist, wrote in an outlook projecting 2017 would have the fastest world growth — 2.9 per cent —since 2010.
Backing up this view, central banks in the United States, euro zone and Britain are leaning toward tightening, albeit with a cacophony of mixed signals about when.
Financial markets are now pricing in a 90 per cent chance of a euro zone rate hike by July next year, for example, to go with the Federal Reserve’s ongoing upward tweaks.
There are, however, some inconvenient trends out there that will need consideration in the second half.
First, there have been some signs of a dip in economic activity, while inflation remains, in most places, stubbornly nonchalant toward the huge monetary stimulus thrown at it.
The Citi Economic Surprise Index, which moves in tandem with data beating or underclubbing expectations, has plunged for the main industrial nations this year and is at negative levels not seen since 2011.
Real US gross domestic product has been increasing, but the pace has been slower in each of the past two quarters up to the fairly slow annualised 1.4 per cent in January-March.
A report by the Atlanta Fed suggests second quarter growth will bounce back — but as a result of stronger home sales, a reflection of cheap money, offsetting sluggish equipment and inventory investment.
Durable goods orders declined sharply and jobs growth slowed at their last readings.
In the euro zone, the overall picture is relatively positive with a current 1.9 per cent year-on-year growth rate — but there are centres of trouble, such as in Italy, the bloc’s third largest economy. And while deflation may have gone, inflation is still below target.
The jobless rate is lower, but still above 9 per cent (twice that for the young), consumer spending has been easing and wage growth is stubbornly slow.
China, meanwhile, has avoided the slowdown some feared. Indeed, factories grew at their quickest pace in three month in June.
But an official crackdown on excessive debt and shadow banking has been enough of a risk to economic stability to make the central bank cautious about taking further action, particularly ahead of this year’s Communist Party Congress.
In Japan, the government has raised its overall view of the economy because of growth in private consumption. But the latest data showed retail sales rising less than expected with slowing sales of durable goods and clothes.
Britain, facing the huge unknown of leaving the European Union, is a case unto itself, with plummeting consumer confidence.
None of this is to say that the world economy is not in good shape, with (non-British) consumer and business confidence generally rising.
There are “mixed signals,” David Folkerts-Landau, group chief economist at Deutsche Bank, wrote to clients, but these reflect “momentum softening in the margin, but still robust”.
But enough uncertainties exist for the Bank of International Settlements — the central bankers’ banker — to warn of risks ahead from a turning financial cycle, unmanageable household debt, and weak productivity growth among others.
These are hard to track, but there will be a number of data spot-checks in the coming week.
Full purchasing manager indexes and equivalents such as Japan’s Tankan will show whether manufacturing and services growth is keeping up with expectations or succumbing to a mild slowdown.
Germany, France and Britain will also release their latest industrial output numbers.
Finally, the end of the week brings the US non-farm payrolls data for June. The number of new jobs is expected to rise from May’s release, but still reflect a much lower pace of job creation than at the beginning of the year.
In addition to the numbers, there will be talk. The Group of 20 nations meets in Berlin at the end of the week — seeking some kind of unity with US President Donald Trump to keep things going through the second half and beyond.