A tentative uptick in some cyclical indicators confirms our view that global economic growth will accelerate through the first half of this year. Yet the improved economic momentum comes from a weak starting point, with fourth quarter global GDP growth set to be the slowest in seven years. Japan was a key factor in the Q4 malaise, with the October VAT hike triggering an expected 3% QoQ saar contraction in growth. An inventory drag in the US and soft growth in Europe added to the weakness…
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A tentative uptick in some cyclical indicators confirms our view that global economic growth will accelerate through the first half of this year. Yet the improved economic momentum comes from a weak starting point, with fourth quarter global GDP growth set to be the slowest in seven years. Japan was a key factor in the Q4 malaise, with the October VAT hike triggering an expected 3% QoQ saar contraction in growth. An inventory drag in the US and soft growth in Europe added to the weakness.
Chart 1: Global Real GDP Growth
Source: Suttle Economics
Some short-term cyclical data are improving. PMIs have ticked up, particularly in China, global trade is accelerating, and data have outperformed expectations in some regions. Hard data are still weak, though, with the pace of the global IP contraction accelerating in Q3 to 0.6% QoQ saar versus 0.2% in Q2. The final quarter of the year got off to a bad start with October IP data falling further. By contrast, world trade posted its best quarterly performance in a year in Q3 with a 2.2% QoQ saar expansion.
Chart 2: Global Manufacturing PMIs
Source: Suttle Economics
Economic surprise indices have started to improve in some regions, albeit from a low base. Data have started to beat expectations in Europe and China. But for the US and particularly Japan, data have been weaker than expected. On the data front, the first few Q4 GDP releases due later this month may be soft. China could disappoint, although remains in-line with the structural slowdown in growth (6% YoY). US GDP will be contingent on the inventory drag, while Euro Area growth is set to remain subdued.
Chart 3: G4 Surprise Indicies
Source: Suttle Economics
Finally, looser financial conditions through 2019 are the main driver of the expected H1 growth rebound. This is already evident in DM consumer durables spending. Last year’s inventory weakness should also be over by the spring. The recent escalation in US-Iran tensions is my top worry. Oil price gains have been limited so far this year but bear watching.
Chart 4: G3*: Financial Conditions
Source: Suttle Economics
If you would like to see a more detailed version of Phil’s outlook, please get in touch with us.
Phil Suttle is the founder and principal of Suttle Economics.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)