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.