09 October 2019
Growth positive and accelerating
The Fidelity Leading Indicator (FLI) Cycle Tracker showed firm improvement in September, solidifying its position in the top-right quadrant (growth positive and accelerating) of the chart. Given the signal’s leading properties, this points to global growth accelerating modestly as we approach the end of 2019. Moreover, the FLI seems unperturbed by yet another escalation of US-China tariffs.
However, the underlying components of the indicator are unusually mixed, suggesting that many of the engines of the global economy are yet to fire convincingly or in harmony. The fading momentum in several sub-sectors means the FLI quantitative ‘bet’ is essentially neutral, around the 50th percentile historically. This is the most subdued ‘bet’ in six months, indicating that while a global recession is unlikely, it is not the time to bet aggressively on either equities or bond yields moving significantly higher.
Global Trade surprisingly strong, Industrial Orders lag
Looking deeper into the components of the FLI, Global Trade showed renewed strength. While year-on-year comparisons still look bad, hard data on activity levels are above their mid-year lows and have proved resilient in September despite US-China escalation. However, a lack of similar improvement in soft data suggests any acceleration is unlikely to extend significantly for now.
The Commodity-linked components extended their top-right quadrant run, despite mixed signals from spot prices. Consumer/Labour is stuck in the top-left (growth below trend but improving). Consumer confidence looks to have peaked, offset by hard data from the US labour market, which bounced after a weak run. Business Surveys are also in the top-left quadrant, still grinding higher. Interestingly, despite the prevailing narrative of a large disconnect between the manufacturing and services sectors, services surveys now look weaker relative to trend than their manufacturing counterparts, some of which, conversely, show signs of bottoming.
Industrial Orders are, concerningly, the laggard. The sector is back in the bottom-left quadrant (growth below trend and decelerating). Japan’s inventory and sales data continued its gradual slide to mark a new post-crisis nadir. US durables goods are similarly yet to find a floor, although, excluding the aberration in aircraft, it does show some signs of stabilisation. Encouragingly, German foreign orders are past the worst, but there is still a lack of positive momentum.
Expect a subdued recovery in 2020
Even after excluding some of the more erratic Trade and Commodity-linked components, we are left with a picture of global growth comfortably past the worst of the first half of 2019. We should enter next year in a recovery phase, albeit at subdued growth rates. However certain countries - even major economies such as the US and Germany - are likely to lag the stabilisation seen elsewhere for idiosyncratic reasons.
One of the main positive drivers is the dramatic easing of global monetary conditions. After tightening last year, developed market yields have plunged by a similar magnitude to 2007-2009. The Fed is again buying bonds and cutting rates more than it anticipated, while the ECB launched a broad-based easing programme. Almost every major EM central bank is lowering rates, many after a painful tightening last year. This is a potent mix.
Chinese policy has been measured but is undoubtedly a support, both on the fiscal and credit side. Deleveraging is on hold after the 2018 credit crunch, with ‘targeted easing’ the order of the day.
Risks are abundant, of course. The US-China trade war is at the forefront. A ‘mini-deal’ seems unlikely given our experience thus far, recent news flow and Trump's electoral ambitions. Still, with the impact concentrated in these two, large, domestically-oriented economies, and given that several rounds of tariff escalation have not prevented the FLI from accelerating, the global economy appears to have the resilience to weather further tensions. Elsewhere, the fast-fading boost from prior years’ US fiscal policy, amid a mature credit cycle and tight labour markets, suggests that the US will continue to slow - even if the rest of the world picks up.
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