12 September 2018
Although the FLI is languishing in the bottom-left quadrant of its 'Cycle Tracker' (growth negative and decelerating) for the sixth consecutive month, it has edged up towards improvement. The FLI still suggests an underweight to risky assets, but is at its least negative level since the first quarter this year.
The trough isn’t yet here, but it could be near.
Source: Fidelity International, September 2018
The FLI is composed of five sub-sectors: business surveys, industrial orders, consumer and labour, trade, and commodities. Four of five sub-sectors remain in the ‘bottom-left’ quadrant this month. However, we are seeing some signs of bottoming out.
The industrial orders sub-sector continues to lead the weakness. Germany’s new foreign orders data betray a sharp cooldown in Eurozone activity, potentially related to its ties with emerging market trading partners. US-related indicators, conversely, are quite neutral. As a result, US components of the FLI outperform. The commodities sub-sector is lacklustre, driven by sensitivity to China’s industrial slowdown. We will be watching this area particularly closely, given the recent policy easing measures coming out of Beijing.
Business surveys had been closely mirroring the industrial orders data into the ‘bottom-left’ quadrant, but are now tentatively moving up. European bellwether surveys, like the German IFO, look slightly more positive after an awful run.
Consumer and labour data look strong, and the sector is on the cusp of reaching ‘acceleration’ at long last. The only concrete positive is global trade, which remains in the ‘top-right’ quadrant. This does suggest a resilient Asian trade complex, although we are mindful of demand front-loading ahead of potential tariffs
The key drivers of global growth have been moving in a negative direction this year. In our view, the three key factors for the economy have been:
- Tougher global financial conditions, driven by tighter US Federal Reserve policy and widening US fiscal deficits crowding out global activity. The damage inflicted on emerging markets has been particularly acute, and is still yet to feed fully into slower EM growth.
- Slower Chinese growth, driven by tighter domestic financial and fiscal conditions, particularly in its resource-heavy 'old economy'.
- Rising oil prices, up 50 per cent year-on-year, which provide a meaningful headwind to global activity.
Global economic growth to plateau going into 2019
Whether Beijing’s recent easing measures are successful is crucial to the question of where the global economy will go from here. For now, the measures seem insufficient to reverse a slowdown that clearly has policymakers concerned. Any signs of the Fed slowing its course of monetary tightening into 2019 would also be reassuring. Trade wars, European politics, and second-round impacts from EM weakness all present additional downside risks to the global picture.
That said, if we extrapolate from the tentative stabilisation seen in the FLI over the past two months, economic growth likely plateaus around the turn of 2019. Such an outcome is possible given the absence of significantly negative shocks in the global system, a still-strong US economy, and tentative Chinese easing.
This all suggests that we will likely avoid an end-of-cycle global recession. So, while the FLI still signals some caution on broad risk assets, it also points to materially reducing underweights in beaten-up areas. Perhaps the coming months could even bring outright optimism.
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