Thursday 03 September 2015
by Craig Swanger
Two speed global economy is back - but this time we are on the wrong side of it
Just after the GFC, we referred to the “two-speed global economy”; one speed being emerging markets driven by China’s economic health and high commodity prices, the other being the mature economies of the US, EU and Japan, all in recession
A few years later, we are heading for a different type of two-speed global economy. Now it’s the emerging economies’ turn to weaken, while the US and UK leads the mature economies back to health. Even the EU is showing some very early, but still encouraging signs of recovery.
But the aggregate result for the world economy is weaker and will remain weaker than we have seen at any time since the early 1990s.
Data releases this week highlight this point clearly:
- China PMI (Purchasing Managers’ Index, an indicator of manufacturing activity) fell below 50, indicating contracting activity.
- Australia’s GDP comes in at just 0.2% for the June quarter this year, and that’s largely driven by government spending, not sustainable economic activity.
- Last night, US jobs data and its central bank’s “Beige Book” (snapshot of the state of the US economy) showed the country’s recovery continues, but is unlikely to be strong enough to make up for the falling growth in emerging markets. Key points:
a) ADP Payrolls Report, an early indicator of Friday’s official jobs report, showed jobs growth continues, but slightly below market expectations.
b) The Beige Book’s most interesting data is stagnant wages growth. Wages growth is a major determinant of interest rate decisions: signs of higher wages growth lead to higher inflation risk, which will lead a central bank to increase rates. GDP growth in the third quarter will be around 1.8% to 2.0%, well below average, but stable.
When combined with stockmarket volatility and rising fears that the bull market is over, business and consumer confidence in the US, EU and China are going to be the most important drivers of GDP growth and interest rates over the next few months. It’s too early for economic data to show the impact of the stockmarket corrections on confidence and spending. That will start to show over the next 2 to 3 months. Because of this, we maintain the view that the US Federal Reserve will hold rates until December. With Australia’s economy sliding and a strong bias toward downside risks thanks to China and our slowing construction cycle, the RBA is increasingly likely to lower rates very soon. The market is currently predicting a 50% chance of a further 0.25% rate cut in November.
The contents of this document are copyright. Other than under the Copyright Act 1968 (Cth), no part of it may be reproduced or distributed to a third party without FIIG’s prior written permission other than to the recipient’s accountants, tax advisors and lawyers for the purpose of the recipient obtaining advice prior to making any investment decision. FIIG asserts all of its intellectual property rights in relation to this document and reserves its rights to prosecute for breaches of those rights.
Certain statements contained in the information may be statements of future expectations and other forward-looking statements. These statements involve subjective judgement and analysis and may be based on third party sources and are subject to significant known and unknown uncertainties, risks and contingencies outside the control of the company which may cause actual results to vary materially from those expressed or implied by these forward looking statements. Forward-looking statements contained in the information regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. You should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Opinions expressed are present opinions only and are subject to change without further notice.
No representation or warranty is given as to the accuracy or completeness of the information contained herein. There is no obligation to update, modify or amend the information or to otherwise notify the recipient if information, opinion, projection, forward-looking statement, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.
FIIG shall not have any liability, contingent or otherwise, to any user of the information or to third parties, or any responsibility whatsoever, for the correctness, quality, accuracy, timeliness, pricing, reliability, performance or completeness of the information. In no event will FIIG be liable for any special, indirect, incidental or consequential damages which may be incurred or experienced on account of the user using information even if it has been advised of the possibility of such damages.
FIIG provides general financial product advice only. As a result, this document, and any information or advice, has been provided by FIIG without taking account of your objectives, financial situation and needs. Because of this, you should, before acting on any advice from FIIG, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If this document, or any advice, relates to the acquisition, or possible acquisition, of a particular financial product, you should obtain a product disclosure statement relating to the product and consider the statement before making any decision about whether to acquire the product. Neither FIIG, nor any of its directors, authorised representatives, employees, or agents, makes any representation or warranty as to the reliability, accuracy, or completeness, of this document or any advice. Nor do they accept any liability or responsibility arising in any way (including negligence) for errors in, or omissions from, this document or advice. Any reference to credit ratings of companies, entities or financial products must only be relied upon by a ‘wholesale client’ as that term is defined in section 761G of the Corporations Act 2001 (Cth). FIIG strongly recommends that you seek independent accounting, financial, taxation, and legal advice, tailored to your specific objectives, financial situation or needs, prior to making any investment decision. FIIG does not provide tax advice and is not a registered tax agent or tax (financial) advisor, nor are any of FIIG’s staff or authorised representatives. FIIG does not make a market in the securities or products that may be referred to in this document. A copy of FIIG’s current Financial Services Guide is available at www.fiig.com.au/fsg.
An investment in notes or corporate bonds should not be compared to a bank deposit. Notes and corporate bonds have a greater risk of loss of some or all of an investor’s capital when compared to bank deposits. Past performance of any product described on any communication from FIIG is not a reliable indication of future performance. Forecasts contained in this document are predictive in character and based on assumptions such as a 2.5% p.a. assumed rate of inflation, foreign exchange rates or forward interest rate curves generally available at the time and no reliance should be placed on the accuracy of any forecast information. The actual results may differ substantially from the forecasts and are subject to change without further notice. FIIG is not licensed to provide foreign exchange hedging or deal in foreign exchange contracts services. The information in this document is strictly confidential. If you are not the intended recipient of the information contained in this document, you may not disclose or use the information in any way. No liability is accepted for any unauthorised use of the information contained in this document. FIIG is the owner of the copyright material in this document unless otherwise specified.
The FIIG research analyst certifies that any views expressed in this document accurately reflect their views about the companies and financial products referred to in this document and that their remuneration is not directly or indirectly related to the views of the research analyst. This document is not available for distribution outside Australia and New Zealand and may not be passed on to any third party without the prior written consent of FIIG. FIIG, its directors and employees and related parties may have an interest in the company and any securities issued by the company and earn fees or revenue in relation to dealing in those securities.