11 February 2020
The FLI cycle tracker has deteriorated notably, implying growth that’s still positive but is now decelerating. Despite easy comparisons to the start of 2019, the FLI is now consistent with near-zero quarterly growth. What’s more, the impact of the novel coronavirus outbreak is yet to be fully reflected, and readings will remain ugly for a while.
Digging into the data, the individual FLI sectors paint very divergent pictures. Despite the pessimistic overall reading, two sectors moved further into the top right quadrant of the chart with growth that is both above-trend and accelerating. Business surveys saw growth turn even more positive, while manufacturing surveys inflected positively, with new orders-to-inventories ratios particularly bullish.
Following their lead, services-sector surveys were also looking better, while global trade similarly improved. Bellwethers in both hard and soft data broke out to the upside after a disappointing 2019. Consumer and labour readings got stuck in the top-left section, with growth essentially at trend and neither improving nor decelerating.
Two sectors drove the latest deterioration, both in the bottom-left quadrant signalling below-trend and decelerating growth. Commodity-linked components intensified their downward slide following a drastic plunge in the Baltic Dry shipping cost index, which is seen as most immediately sensitive to the outbreak.
Industrial orders fared even worse, which is somewhat perplexing given the improving manufacturing surveys. This was driven disproportionately by Japan, where the inventory-to-sales ratio suddenly deteriorated to depths seen only at the trough of the global financial crisis in 2009. Europe was also a concern, with Germany’s foreign orders suddenly dropping to multi-month lows, perhaps reflecting December’s uncertainty ahead of the US-China trade truce. US durable goods also remained weak while showing some nascent signs of bottoming.
What comes after the rebound?
We are not speculating on the length of disruption or spread of the novel coronavirus. The relevant question here is, when the rebound arrives, will we get an upturn that both catches up near to where the global economy would have been had the virus never existed - and endures beyond that point? Foremost, the impact of global easing started last year should not be significantly derailed by the virus, although it could be partly offset if some companies and individuals face financial stress as a result of the outbreak.
Regardless, China stimulus will continue to feed through from last year, and will likely be stepped up into 2020. While there are expectations of a significant response to the virus, policymakers are likely to remain cautious given that old-style real estate and infrastructure spending could exacerbate financial risks. There will probably be no China ‘big bang’-type stimulus.
Peak policy uncertainty?
Policy uncertainty has likely peaked, primarily on the back of the US-China trade truce - and to a much lesser extent the Conservative victory in the UK. However, this is unlikely to spur a large upswing in the FLI. A ‘progressive’ candidate winning the Democratic nomination could create some drag, although the growth hit should be minor, and highly US-centric.
Other 2020 growth drivers, such as the bottoming out of automakers and the somewhat positive fiscal stance of some countries - as well as a modest rollout of 5G networks - should provide limited support.
It’s worth looking back at last month’s data and recalling that, before the virus hit, the FLI was calling for a cyclical recovery on the horizon that would have been about half as large as what we saw in 2012-13 and 2016-17. Indeed, if the virus outbreak peaks in Q1, this may still be the ‘base case’ thereafter. The lack of spare capacity in many major countries may partly explain this ‘speed limit’. The FLI will prove a secondary leading indicator to infection rates for a couple of months, but its caution is merited.
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