Bob Cunneen, Senior Economist and Portfolio Specialist
Global economic activity vs Manufacturing surveys
* The countries collectively known as the Group of Seven (G7) consists of the US, Canada, the UK, France, Germany, Italy and Japan. BRIC refers to Brazil, Russia, India and China. Source: Markit
Some investors have become alarmed about global growth over recent weeks. Both German and Japanese bonds are now registering negative interest rates. Essentially these government bond investors are prepared to give up any interest rate benefit for the perceived ‘safe haven’ of preserving their capital.
Admittedly the global economy has disappointed in the past year. Global gross domestic product (GDP) growth has slowed to a 3.5% annual pace at the end of 2018 compared to the 4% growth at the start of the year (blue line). There has been a multitude of negative influences driving this global slowdown. Concerns about President Trump’s ‘trade wars’, the Federal Reserve (Fed) raising US interest rates and China’s tighter credit conditions have all weighed on global growth.
One troubling indicator of potential problems ahead are the Purchasing Managers’ Indexes (PMI) for manufacturing. A simple average of the PMIs for US, China, Europe and Japan has fallen below 50 in March. This suggests that the global manufacturing sector is sliding towards a recession (red line). While this is concerning, this also needs to be placed in context. Firstly, this measure only covers the relatively small manufacturing sector. The larger services component of the global economy has been more resilient with its PMI at a much healthier 53 level in February. Secondly, weak PMI manufacturing results also occurred in both the 2012 European debt crisis and the 2015 China slowdown without seeing a global recession. So bond investors appear to be very premature in their pessimism.
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