The current meme for the global economy: Excluding the US (and to a lesser extent the UK), growth overall isn’t looking too hot and it may need help—particularly in the form of fiscal and/or monetary stimulus. However, the story is more nuanced than that. While pockets of weakness certainly exist (particularly in commodity-reliant nations), much of the world is growing—and the strong can keep pulling the laggards along. Stocks still have plenty of economic support.
Updated GDP figures confirm broadening, underappreciated growth. See the much-maligned eurozone, which has quietly grown for 11 straight quarters. The second estimate of Q4 2015 GDP confirmed growth of 0.3% q/q, and with 17 of 19 members reporting, only Latvia (-0.3 q/q) contracted. Germany grew just 0.3% q/q, but the bloc’s hottest economy, Ireland, jumped 2.7% q/q—bringing full-year growth to 7.8%. The report also adds more color about quarterly growth, as gross fixed capital formation (1.3%), household spending (0.2%), exports (0.2%) and imports (0.9%) all rose. All are signs external and domestic demand are driving growth forward, contrary to constant handwringing otherwise, and January retail sales volumes’ 0.4% m/m (2.0% y/y) rise suggests 2016 started off on the right foot.
Commodity-heavy economies have also gotten a bad rap, particularly with Brazil and Russia sinking deeper into recession, but they aren’t uniformly weak. Australia expanded 2.6% annualized (0.6% q/q) in Q4 2015, as consumer spending (0.7% q/q) added 0.4 percentage point to quarterly growth—helping offset mining’s struggles. Similarly, Canada, hit hard by falling oil prices, grew 0.8% annualized in Q4, besting expectations. Household spending rose 0.2% q/q, with services (0.4% q/q) the biggest contributing component. While both Australia and Canada have big commodity sectors, they aren’t one-trick ponies like Brazil and Russia.
Throw in the US and UK’s solid Q4 GDP reports, and it’s pretty clear the developed world is doing just fine, overall and on average. It isn’t all bluebirds and lemonade, as Japan’s struggles continued with the second estimate of Q4 GDP revised only slightly higher to a -1.1% annualized contraction. The upward revision isn’t really cheerworthy either, as it came from inventories—always subject to interpretation. The higher number could either mean businesses are anticipating more demand or they’re struggling to work through existing inventory. Given tepid domestic demand (private consumption fell -0.9% q/q), the latter seems more likely. But though Japan has struggled for years, with three recessions since 2011, it has yet to derail the current global expansion—and we see no reason this will change.
So far, early indications are Q1 started off on a reasonably nice note. In the US, the February Institute for Supply Management’s Manufacturing Purchasing Managers’ Index (PMI) rose to 49.5 from January’s 48.2, while the Non-Manufacturing PMI ticked down from 53.5 to 53.4. (Readings over 50 indicate expansion.) While the media largely glossed over the latter, instead highlighting the contractionary reading in Markit’s US Services PMI, this seems a tad myopic. Besides the usual “monthly data are volatile” disclaimer, Markit’s gauge also has a much shorter history (it has never existed during a recession) and has been far more volatile than ISM’s gauge, even though ISM’s includes the very troubled mining sector. So we’d consider ISM’s growth reading more telling. As for manufacturing, though its contractionary streak continued, this shouldn’t necessarily signal trouble. PMIs are surveys reporting how many businesses grew or not, giving, at best, a rough picture of recent economic conditions. They don’t measure magnitude of growth (or contraction). So a slower PMI reading like ISM Non-Manufacturing’s doesn’t automatically translate to a slower economy, and a contracting PMI doesn’t always mean activity falls sector-wide—a point France has proven numerous times since 2013. More telling is that the New Orders subindex for both Manufacturing (51.5) and Non-Manufacturing (55.5) point to future growth. Today’s orders are tomorrow’s production.
February PMI readings across the Atlantic similarly slowed but remained above 50—nothing suggesting contraction. Eurozone and UK Manufacturing PMIs were 51.2 and 50.8, respectively. For Services, the eurozone hit 53.3 and the UK eased a bit to 52.7. Even Industrial Production gauges—which have been soft—enjoyed a rebound in January. German Industrial Production rose 3.3% m/m, its fastest monthly jump since September 2009, while French Industrial Production bested expectations at 1.3% m/m. UK Industrial Production rose 0.3% m/m, as manufacturing (0.7% m/m) more than offset North Sea oil’s continued decline. Now, we aren’t arguing one month of Industrial Production data is reason to be bullish. However, it does counter the many fears of faltering heavy industry dragging down the global economy.
That leaves China, where February trade numbers weren’t great: Exports fell -25.4% y/y and imports dropped -13.8% y/y (both in US dollar terms), extending longer declines. However, the Lunar New Year holiday likely skewed the numbers, as it does every year. China typically lumps January and February data together to account for the Lunar New Year’s shifting placement on the Gregorian calendar. Compared to last year’s January/February, exports fell a not-as-bad -17.9% y/y, though imports were a bit worse at -16.6% y/y. However, falling commodity prices impact those import figures quite a bit. In volume terms, imports of raw materials rose. And another big caveat: Chinese trade data cover only goods, not services. Cross-reads from other trading partners show Chinese demand remains solid. For example, Australia reported services exports (many to China, its largest trading partner) are now outpacing commodity exports for the first time in almost six years. Sectors like tourism—where visitors from China are up almost 22% from 2014—are booming. While growth is indeed slowing as the economy transitions to a services-led model, the evidence counters fears China’s current prospects are dire.
In our view, folks fretting the global economy’s weak spots aren’t giving enough credit to the stronger parts—a bullish disconnect between dour expectations and a better-than-believed reality. This has been good enough for stocks for nearly seven years now, and it’s still bullish. Stocks move most on the gap between expectations and reality, and folks recognizing that economic drivers are in better shape than previously thought should help boost investor sentiment—driving the global bull market higher.