All eyes on the global signs for weak manufacturing
Global economic data have continued to disappoint in early 2019. This has seen the Organisation for Economic Co-operation and Development (OECD) lower its growth forecasts yet again for the world economy.
In the middle of last year, the expectation was that the world economy would grow by close to 4% this year.
The latest OECD forecasts now project that the global economy will expand at a below-trend rate of 3.3%this year and by 3.4% in 2020.
Furthermore, the OECD warns that downside risks are continuing to build for the world economy.
It notes that growth in global trade has slowed sharply, with escalating trade tensions having adverse effects on confidence, investment activity, and financial markets.
Notably, the Chinese economy has lost momentum, with the imposition of tariffs on many of its exports to the US adding to the headwinds it faces.
More generally, manufacturing activity has slowed in all economies since last summer.
The global manufacturing purchasing managers’ index (PMI) fell to a near three-year low in February, amid declining export orders and sluggishness in international trade.
The OECD, European Commission, Bank of England, and the ECB have all recently scaled back considerably their growth forecasts for European economies in 2019 as are sult of continuing weak data.
Meanwhile, there are concerns that growth in the strongly performing US economy could slow quite sharply in the next couple of years, as the fiscal stimulus fades and higher interest rates start to impact on activity.
It is concerning that the JP Morgan Global Composite PMI, a good gauge of global economic activity, fell to 52.1 in January, its lowest level since September 2016 and is far below its recent peak of 54.8 reached a year ago.
The global PMI staged a modest recovery in February, rising to 52.6 on stronger activity in the services sector, but manufacturing continued to weaken.
Risks remain to the economic outlook.
Both the International Monetary Fund and the OECD have warned that continuing easy monetary conditions could result in a further build-up of vulnerabilities in financial markets.
This can lead to volatile trading conditions, as we saw last year.
Debt levels also remain high in many countries, leaving them susceptible to shocks.
We have already seen the economies of countries with high debt levels, such as Turkey and Argentina, entering recession.
Meanwhile, concerns about the health of the Chinese economy could also trigger abrupt sell-offs in financial markets, especially if the economy there slows more sharply than expected.
However, the general expectation is that despite the numerous downside risks, the global economy should regain some momentum as the year progresses.
Monetary policy is set to remain accommodative globally, which should aid growth.
Fiscal policy also remains supportive of growth in most economies.
Household spending power will be boosted by the recent declines in headline inflation and a pick-up in wage growth.
A resolution to some of the factors that have been weighing on activity in various economies in recent times, such as Brexit, new car fuel emissions standards in Germany, as well as the US-China trade dispute, could also help the world economy regain strength.
However, a close eye will need to be kept on the data in the coming months, especially the key survey indicators, to assess the trends in the global economy, most notably in the under-pressure manufacturing sector.
