It’s bad but could be worse and that’s good
In the middle of October, the economics community gathered for its annual parley to discuss the recent past and the path ahead. Holding court in Washington D.C. the International Monetary Fund and World Bank offered the standard fare of policy, outlooks, inflation, debt and employment along with more interesting morsels: empowering women entrepreneurs, how to ‘green’ economics, conflict and violence. However, the week’s tone – the seasoning, if you will – had a piquancy to it when the new head of the organisation, Bulgarian Kristalina Georgieva, pronounced the world’s economies still synchronised, but that it was no longer a good thing saying, “…growth this year will fall to its lowest rate since the beginning of the decade”.
It has been widely acknowledged that the post-2008 ‘recovery’ from the Great Financial Crisis has been the weakest of the 74-year post-World War II era. Thus, to recast what Georgieva said in starker historical context, the most disappointing ‘recovery’ in four generations is, this year, anticipated to deliver its worst annual rate of global growth.
It gives your writer – sometimes given the honorary doctorate ‘Dr. Doom’ – no satisfaction in disagreeing with the IMF. Nevertheless, a more encouraging, constructive outlook for the global economy is reasonable. Recent data from leading economic indicators, sentiment surveys and monetary metrics suggests the rapid deceleration in global economic activity is abating. The balance of probabilities now favours surprises to the upside.
The optimism of the Black Knight
One can observe improvement in several key areas; for example, South Korean exports. Why would readers be concerned with what a small country dangling off the far-right edge of Asia is exporting? Because as one the world’s most complex and largest economies, South Korean exports say more about the state of the global customer than it says about the nation. Presently, that customer is not buying; exports have been negative year-over-year for 11 months in a row. But a second look shows the deep contraction has stopped cutting deeper. The situation reminds your writer of a moment from a mid-1970s biographical docudrama regarding the life of Arthur Pendragon. After a melee with King Arthur, the Black Knight, seeing that his left arm was cut off, responded, “‘Tis but a scratch.”
Another leading indicator of future world economic activity is Japanese machine tool orders. The world’s most complex economy and fourth-largest exporter by value devoted 36% of its exports in 2017 to machines. Orders for machine tools are the leading edge of the commitment Japanese manufacturers are willing to make in the search of financial return. Presently, Japanese manufactures, having reviewed their customers’ conditions, are chopping orders with a fervor not seen in over a decade. But the rate of deceleration – the change in change – has slowed to zero. Data is still dreadful, but not getting worse.
Germany’s new orders in manufacturing are the last in a triad of real transactions your writer relies on to augur economic tendencies. The world’s third-largest exporter by gross value, the country has devoted 47% of the planet’s fourth-largest economy to selling to the rest of the world. The new orders in manufacturing data are available back to 1991 and there have only been two worse periods than the present. In that context, the present data is daunting, not just for Germany, but for what it says more broadly about the state of the international economy. And yet the data has been less bad since May. Here again, the data reads as if it were lifted from Brittonic scrolls of the late 5th and early 6th centuries. After another scuffle and the loss of his second arm, the Black Knight observed, “Just a flesh wound.”
The pooling of red can also be observed in sentiment data, which precedes leading signals of consummated activity. Surveys of purchasing managers in manufacturing industries are generally, across a 20-country sample, at a multi-year nadir. But, like markers from South Korea, Japan and Germany, they have stopped getting worse. An even broader amalgamation of sentiment surveys and other leading indicators constructed by the Organisation for Economic Co-operation and Development across 38 important economies hints at a developing inflection.
Like sentiment and economic statistics monetary measures are also decidedly negative. Some of the indications are outright alarming. Spreads in the overnight repurchase agreement market still register spikes indicating the lack of liquidity, practically at any price. And the market-based effective Federal Funds spread relative to the technocratically determined Federal Funds target still has brief blowouts, indicating that sometimes the Federal Reserve cannot control its own money market rate. That being said, both private and public banks are worrying a bit less lately. In fact, generally speaking, the banking barometers have stopped getting worse and started to improve. It is not dissimilar – in this writer’s opinion – to the canonical Arthurian literature. With four appendages forcibly detached, the Black Knight informed King Arthur, “I’m invincible!”
Always look on the bright side of data
Does the potential for less-worse data signal ‘recovery’? No, because the underlying structural disorder – a global monetary shortage – remains unaddressed.
If not ‘recovery’ then what about a solid ‘reflation’ (i.e. partial recovery)? No, this also seems improbable. How much effort would the business owner, wholesaler and capital supplier put into a fourth reflation after the first three were scrapped? The ‘green shoots’ recovery of 2009-10 proved to be weeds when the European sovereign debt crisis struck in 2011-12. The ‘global recovery’ of 2012-13 was revealed to be neither global nor recovery when the emerging markets roiled in 2014-16. The 2016-17 harmonisation of ‘globally synchronised growth’ turns out to have been of the oscillating variety, with economic momentum now attuned in the negative direction since 2018.
The Global Business Outlook Survey, a decade’s long effort by IHS Markit, the business information company, is based on a panel of 12,000 manufacturers and service providers from 7,000 firms and is conducted three times per year. The survey shows how each reflation produces lower expectations. Each one feebler; each one less optimistic than the one before.
Thus, concerned market participants are left with ‘rebound’. Dignified financial professionals call it a ‘dead-cat bounce’.
The business media is predisposed to look on the bright side of economic data. And the next wave of positivity appears to be near-at-hand because the worst impact of this present global downturn was in the fourth quarter of 2018. As the world economy laps this period the year-over-year comparisons likely will not seem as bad. Deceleration will slow, fears will seem overblown and doomsayers defied. An impending, swelling chorus by the financial media Sirens could lure the unwary onto the rocks with songs of ‘recovery’.
Nevertheless, in the spirit of Thanksgiving (Canadian and American), Hanukkah, Christmas and the New Year, your writer will make it a point to look on the bright side of economic data. It is a philosophy epitomised in the 1979 historical period comedy ‘Life of Brian’ by Monty Python, when in a final, lyrical scene with all hope lost and death close at hand, a character sings: “If life seems jolly rotten, there’s something you’ve forgotten, and that’s to laugh and smile and dance and sing. When you’re feeling in the dumps, don’t be silly chumps, just purse you’re lips and whistle, that’s the thing.”
Emil Kalinowski, CFA, is a member of the CFA Society Cayman Islands board.