Is the Global Slowdown Over?

For months, the world has been bracing for a recession. Now, financial markets suggest the worst could be over. Is it premature to celebrate?

Source Leslie dela Vega/OZY

Why you should care

If the markets are right, the economy might have pushed away recession fears for now.

Financial markets have been riding high this month, signaling rising optimism about the global economy only a few weeks after the International Monetary Fund (IMF) described it as “precarious.”

With 2019 looking certain to post the worst global economic performance for a decade — reflecting rising U.S.-China trade tensions and their dampening impact on exports and industrial production — investors see possible green shoots of recovery next year and do not want to miss out on potential gains. 

Some of this is not surprising. The IMF and other forecasters expect 2020 to be better than 2019, but the market moves in recent weeks raise the question now as to whether the outlook is much improved. Investors’ enthusiasm may be overblown. So far the evidence suggests the slide in the global economy is coming to an end, but the pace of recovery is still expected to be weak. 

There are definite signs among global activity indicators that the worst of the slowdown is behind us.

Innes McFee, Oxford Economics

Financial markets pride themselves on being forward-looking, catching on to trends before they are obvious in the economic data. With many equity markets close to all-time highs, investors believe the prospects for corporate profitability have improved sharply since the start of the fourth quarter. Government bond yields, a good indicator of economic optimism, have risen across advanced economies, suggesting central banks will not have to work hard to stimulate economic growth and inflation. 

“As 2019 draws to a close, the market is pricing in economic recovery, with equities in the U.S. hitting new highs and long yields well off the recent lows,” says Ric Deverell, chief economist at investment bank Macquarie. 

Much of the fear regarding the global economy in October stemmed from the real possibility that the global trade wars would intensify. In the past month, the news has been positive. 

The chance of a disruptive no-deal Brexit as the U.K. looks to leave the EU has dropped sharply after Prime Minister Boris Johnson withdrew objections to a customs border in the Irish Sea. Tensions also eased between the U.S. and China, and President Donald Trump did not impose tariffs on European cars by his mid-November deadline. 

These trends have become visible in trade data, with global goods trade volumes growing in the most recent two months of data from July and August. This month, investment bank J.P. Morgan’s export order element — which tracks companies’ orders of foreign goods and services — of its global purchasing managers’ index for October improved by the largest amount in four years — albeit from a low base. 

While the improvement in the trade outlook has buoyed financial markets, it has not yet found its way into economic forecasts. The outlook for 2020 growth has stopped getting worse, but upticks in forecasts remain tiny according to data from Consensus Economics, which averages forecasts from major independent economists. 

After watching the “slide in the global economy” over the past 18 months, Peter Hooper, global head of economic research at Deutsche Bank, notes that in recent weeks there are “tentative signs of an easing” in the downward trends. 

Though the signs are still nascent, some are celebrating the end of evermore gloom in forecasts. “There are definite signs among global activity indicators that the worst of the slowdown is behind us,” says Innes McFee, managing director of macro and investor services at the consultancy Oxford Economics.

Although many survey indicators have continued to deteriorate, such as the regular forward-looking economic sentiment indicator from the European Commission, others are now showing more positive signs. 

The PMI indices for manufacturing in October, released this month, improved for the majority of the countries in the world, including big industrial powers such as Germany, the U.S. and South Korea. 

In Europe, data on industrial production increased for the most recent two consecutive months, interrupting a period of steep contraction. Even Germany — which has suffered the most in the region from the industrial downturn — reported stronger than expected export growth and industrial orders in September. 

The improvement in the eurozone’s powerhouse is important. “German indicators are highly correlated with global trade dynamics,” says Katharina Utermöhl, senior economist at insurer Allianz. 

Despite these increases, however, the outlook is still muted. Eurozone industrial production is still contracting on an annual basis and German manufacturing output was down 5 percent in September compared to the same month last year. 

The modest uptick in data does not yet provide convincing evidence for a broad-based global recovery. Monthly data remain volatile and many of the more positive industrial indicators represent only small proportions of the world economy.

When economists allowed a computer algorithm to evaluate the data, for instance, the outlook does not seem to have changed as much. According to analysis by Now-Casting.com, a macroeconomic monitor, recent data releases from around the world have been mixed and do not point clearly to an improved outlook for the fourth quarter of this year. Improvements in the eurozone are offset by weaker data in the U.S., Canada and Japan. 

“We expect global growth to edge up over the course of 2020, but the pace of recovery will be weak by past standards,” says Neil Shearing, the group chief economist at Capital Economics. “Policy will have to remain accommodative.”

There still needs to be a lot more movement in the data before economists will join financial markets in believing the worst of the global economic slowdown is over. 

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By Valentina Romei and Chris Giles

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