11 March 2019
The FLI Cycle Tracker remains far in the ‘bottom-left’ quadrant (growth below-trend and decelerating), having now spent eleven months there, indicating that the current downturn may still have some way to go, deep into the first half of this year at least. Ominously, OECD industrial production - which the FLI is designed to lead - has also turned negative year-on-year for the first time since 2015/16. The FLI quantitative ‘bet’ edged up but remained negative for the fourth consecutive month at the 33rd percentile of its history.
Source: Fidelity International, February 2019
Below trend and decelerating
Four out of the five sub-sectors remain in the bottom-left quadrant of growth below trend and decelerating. Industrial Orders are a key source of weakness. Germany’s new foreign orders show very tentative signs of stabilisation, having slumped to deeply negative levels, but this is offset by Japanese data plunging dramatically. The latter is likely related to Global Trade, where indicators show no signs of improvement. Bellwether Korean data is particularly poor, as Chinese imports plunge and the semiconductor downcycle deteriorates further.
Business surveys are subdued, though not declining as sharply as they once were. The Commodities cycle tracker is swirling upwards but is dragged down significantly by the continued weakness of the Baltic Dry Index.
The only reasonably positive sector is Consumer/Labour, which has moved marginally back up into the top-left quadrant of growth negative but improving. Even here, it is hard to get excited, with the improvement driven by a big rebound in French confidence as the Gilets jaunes protest fades. Weakness in some US labour indicators, unemployment claims and overtime hours worked, now act as a material drag.
Continued risks to growth
Several key headwinds to global growth persist, and it remains unclear whether policymakers are still doing too little; China’s slowdown has intensified, in the shadow of last year’s credit slowdown and depressed private sector confidence. Credit growth, which failed to emerge in late 2018 despite some policy action, needs to resume. January’s lending data was unprecedentedly large, providing good news, but subsequent releases need monitoring given possible New Year distortions.
Fiscal stimulus could provide significant support but the size and efficacy of recent announcements are by no means clear. The indicated central government tax cuts are positive, but not as immediately impactful as outright spending, and are partly offset by other measures. Off-balance sheet stimulus provides hope, notably increased local government bond quotas, however, such quotas have appeared meaningless in the past. An indefinite delay to US tariff escalation is clearly positive, but the trade war was never a primary cause of China’s slowdown.
Meanwhile on US policy, the Fed has effectively gone on hold, as rates markets start to price the possibility of cuts and focus turns to the end of quantitative tightening. However, this has yet to materialise into a weaker US dollar, dampening the stimulatory impact, and any boost would only come with a meaningful lag. Moreover, signs of a US slowdown are mounting, including our US GEAR (Gauges of Economic Activity in Real-Time) - the US may finally be joining the global downturn due to the fading US fiscal stimulus.
Oil prices remain range-bound and seem to have found a balance between OPEC cuts and US supply growth. This is a big global boost, relative to 2018.
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