March 6, 2011 1:19 pm
http://blogs.ft.com/gavyndavies/2011/03/06/a-week-in-global-macro-gdp-growth-moves-above-5-per-cent/
This week, the oil shock continued to build, but financial markets still viewed it as insufficient to puncture the upswing in the global economy. Business survey indicators in America and Europe hit new peaks for the cycle, but China continued to lag. The ECB responded to the upswing by pre-announcing their intention to raise interest rates next month – the first of the major central banks to do so in the developed countries. But the Fed remained determinedly dovish. The extent of this continental drift between the big two central banks is quite unusual.
This week, I learned that:
1. Business surveys in America and Europe are hitting new peaks for the cycle….
The first week of the month always sees the publication of the key business surveys in manufacturing and service sectors across the world.
The global averages rose further in manufacturing – up 0.7 points to reach 57.6, the highest reading in the upswing so far. In non manufacturing, the global average fell by 0.5 points to 56.2, but this was still the second highest reading in the current cycle. Furthermore, the output components of the non manufacturing series were far stronger than the headline series, notably in the US. So far in 2011 Q1, these survey indicators are pointing to GDP growth in the global economy running at about 5.5 per cent annualised, which is about 1.5 per cent above trend, and is equal to the peak growth rates which were occasionally hit during the expansion of 2003-07.
2. But China is continuing to lag other major economies….
As the above graph shows, the PMI readings for both China and Japan are currently well below those in America and Europe – in fact, the extent of the regional disparity between the major economies is much wider than usual. Japan, however, appears to be moving strongly in the right direction, while China is showing lacklustre readings in both the manufacturing and services sectors. Last month, Chinese weakness may have been due to the pause in activity which normally takes place during the holiday season, and we will learn more about this when the monthly economic data are published next week. But I think that the evidence is mounting that the economy has now been slowing for some time, in response to the policy tightening which started last year. This looks set to continue, since the government now appears determined to get inflation under control.
3. The US is hitting long term historic peaks in its business surveys…
The ISM readings for the US last month were not only the highest for the current cycle, but were also among the highest in recent history. The second graph shows the manufacturing survey results going back into the 1970s, and the non manufacturing results since the inception of that survey in the mid 1990s.
It is clear that readings as high as current levels are extremely rare, and generally do not last very long. These survey results, and the better employment numbers published last week (see this earlier blog), have out-paced other economic data published so far during the quarter. In fact, the consumer seems to have lost a lot of momentum since the turn of the year, and we will need to watch the retail data next week for a better reading on this. But business surveys and labour market information are always regarded as the most important data by the financial markets, which is why there has been almost no attention paid to the retail slowdown so far.
4. The oil shock continues to build…
The oil price rose by another 4 per cent last week, and the political situation in the Middle East continued to worsen. Libya seemed to be on the brink of civil war, and political demonstrations erupted in the Shiite regions of eastern Saudi Arabia. Despite all this, the global financial markets showed little sign of real concern.
Global equities were flat on the week and are now up by 3.4 per cent year to date. Global bonds were also flat on the week, and are little changed so far this year. Markets seem to believe that the oil shock will be temporary, or that it will not be sufficient to interrupt the extremely strong economic momentum which was in place before the shock occurred. However, it seems to me that financial markets often fail to make small continuous adjustments in response to rising risk; instead, they appear to ignore the developing situation, and then suddenly make a discontinuous shift when risk becomes reality. See this FT piece for an assessment of how the oil situation in the Middle East could worsen. Unlike the markets, I find these risks hard to ignore.
5. Central banks have a case of continental drift…
Quite often, the ECB seems to adopt a more hawkish stance than the Fed, but not to the extent that the world’s two most important central banks head in entirely opposite directions. This week, they did. Ben Bernanke and Bill Dudley (analysed in this blog) concluded that the impact of the oil shock on inflation would be, “at most, temporary and relatively modest”. The ECB, in contrast, threatened to take pre-emptive action by raising rates next month, to ensure that higher commodity prices do not feed into wage settlements. Unlike some other commentators, I do not think the ECB is bluffing.