The Chief Economist’s Note

Springtime for the global economy?

Three pieces of data released last week brought hope that, having slowed for the best part of six months, the world economy may now be starting to stabilise.

First came March’s Caixin manufacturing PMI for China, which rebounded to an eight-month high. Then, later in the week, industrial production data from Europe’s manufacturing powerhouse, Germany, came in well above market expectations. And finally came the news that the US economy added 196,000 non-farm jobs in March, which together with some positive revisions in the back series, helped to provide some reassurance that February’s sharp drop in payrolls growth was an aberration rather than the start of a new trend.

Taken together these are encouraging developments and certainly make a pleasant change from the run of increasingly gloomy data released since the start of this year. But claims that the world’s major central banks have saved us from a synchronised global downturn and that the scene is now set for a revival in growth feel premature.

First, and most obviously, these data are volatile and we should never read very much into one month’s figures. Second, this point notwithstanding, in each case last week’s data releases aren’t quite as bullish as the headline figures suggest. The rebound in German industrial production was driven almost entirely by a strong contribution from the construction sector, which is unlikely to be sustained. The manufacturing sector remains extremely weak.

Meanwhile, in the US, employment growth is still on a downward trend, average hourly earnings growth is edging down and a decline in temporary help employment in March could be an ominous sign that permanent employment will weaken in the months ahead.

Finally, while China’s manufacturing sector seems to have bottomed out, a sharp drop in land purchases in recent months suggests that the construction sector, which has been a key prop to the economy over the past couple of quarters, may now start to soften.

Stepping back, the better tone of last week’s releases needs to be viewed in the context of the persistent (and in some cases alarming) deterioration in the economic data over the previous three months. We’ve been arguing for a while that economic growth in both China and the euro-zone would bottom out around the middle of this year. Viewed this way, last week’s developments don’t come as much of a surprise.

The bigger question, in our view, is whether a stabilisation in the data, alongside a more accommodative stance from the world’s major central banks, provides the backdrop for a sustained upturn in growth? This seems doubtful. On the supply side, most economies are now running at full employment, meaning that a sustained pick-up in GDP growth will require a revival in productivity. While this is possible, it has so far been elusive. Meanwhile, in the absence of a corresponding pick-up in productivity growth, any recovery in demand will simply spur central banks back into action.

Last week’s releases provide some reassurance that the world economy is not falling off a cliff, which had seemed a plausible, if relatively small, risk as recently as a month or so ago. This is clearly good news. But we remain in the late stages of this global economic expansion. Springtime inevitably brings with it an air of optimism for the future – but in the case of the world economy at least, we expect growth to remain subdued.

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