The turbulence in the global financial markets in the past few weeks has been widely attributed to a “China shock” that has increased the risks of a major downturn in global activity. Last month, this blog concluded that our regular “nowcasts” for global activity had not yet corroborated this narrative.
This month, we have identified the first clear evidence that the global economy has slowed down since mid year, with emerging markets and advanced economies both now growing more slowly. A new factor is a clear slowdown in the US economy, though much of this appears to be due to the temporary effects of an inventory shake-out.
The Chinese economy has not shown any further signs of slowdown in September. The dominant contractionary force in the global economy is a commodity shock, which of course is somewhat connected to events in China (as it rebalances its economy away from commodity-consuming sectors), but it is not exactly the same thing.
The commodity shock is redistributing activity away from commodity producers and towards commodity consumers, both within and between countries. Eventually, the commodity shock should be net beneficial to the global economy, but so far global activity growth has dropped to only 2.6 per cent, which is 0.4 per cent below the rate in mid year, and 0.8 percentage points below trend. This means that global spare capacity is currently rising at a worrying rate.
Because the emerging markets are much more exposed to commodity producers than developed markets, they have been hard hit by the commodity shock. They are now growing at 3.5 per cent, or 1.5 percentage points below trend. It is unclear whether this growth rate is still dropping.
In the advanced economies, the growth rate in activity is about 1.7 per cent, which is roughly at trend. The slowdown identified in the US in September has been offset to some extent by signs of firmer activity in the eurozone.
An important and worrying feature of global growth in 2015 has been the large drop in global industrial production relative to services in the second quarter. This was driven mainly by weakness in industrial production in the US energy sector – not in China – and it has since been reversed.
Here are the details of the latest nowcasts.
World Activity Downgraded, With Rising Spare Capacity
The latest estimate for overall global activity shows that the growth rate is now 2.6 per cent, which is clearly below our latest estimates of the growth rates that were observed in mid year. In fact, the global economy is now growing about one standard deviation below trend. This is far from a recession, but is nevertheless now giving some moderate cause for concern.
This latest estimate is about half a point lower than the estimates we made in real time during the summer. That gap represents a significant downward revision to the growth rates that we had believed to be in place for much of the year. All of the downward revision stems from the EMs, and much of it has come from Brazil and Russia alone.
Therefore, the world as a whole is expanding at a rate that is 0.8 percentage points below trend, considerably worse than we had previously estimated. Spare capacity in the world economy has therefore been rising at a rate that is more worrying than we previously thought. This may be a source of increasing deflationary pressures in the global economy.
EM’s Growing Far Below Trend Rates
The EMs are now growing at a rate of 3.5 per cent. This growth rate (solid blue line) is 1.5 percentage points below trend, and is more than half a percentage point below the growth rates that were estimated in real time (dotted blue line) by our models earlier in the summer.
How should we assess this result? On the positive side, it suggests that the growth momentum in the EMs has not fallen much in the past quarter, despite the general pessimism about EM growth that has dominated public commentary on the subject. On the negative side, the margin of spare capacity in the EM bloc has been growing more rapidly than we have previously estimated.
Turning to individual economies, our latest estimate for growth in Chinese activity is 6.2 per cent, which is roughly the same as last month, and actually a bit higher than the 5-6 per cent rates seen in mid year. It seems that the policy easing that started in April, and continued in August, may be having some effect, despite clearly increasing headwinds from the industrial and real estate sectors of the economy.
The growth in commodity demand from China has fallen much more sharply than overall GDP, because of the shift in the composition of growth away from the industrial sector and towards both services and finance. This helps explain why there may have been a commodity demand shock in the world economy recently, despite stable growth in China’s overall activity.
It is possible that China’s official GDP data are also over-stating the actual growth rate, though we have argued before that this should be picked up by our methodology, which includes many data series from outside the official GDP dataset.
Outside China, the most dramatic events have come from two commodity producers that are now acting as a severe drag on EM and global activity growth rates. Brazil is in free fall, with activity growth at -6.9 per cent, which is much lower than we have previously estimated. Russia is also experiencing a much deeper recession than we previously estimated, with activity growth now at -3.5 per cent. As mentioned before, the nowcast models are less reliable in some of the the EMs than in the DMs, but that is unavoidable because of data limitations.
India, a commodity-consuming country, has also slowed a bit this month, with activity now growing at 4.5 per cent.
US Slows Slightly But Euro Area Gains Momentum
There is less excitement in the advanced economies, which are growing at 1.7 per cent. In sharp contrast to the EMs, this remains roughly at trend, though there has been a slowdown in growth since the 2 per cent rates that were recorded in July.
Among individual economies, growth momentum in the US and the eurozone appears to be moving in different directions. In the US, recent data suggest a moderate slowdown to a growth rate of 1.9 per cent, more than half a percentage point below the rates observed in mid year. Much of this decline seems to be due to a significant burst of inventory shedding, which has cut GDP growth by about 1.2 percentage points in 2015 Q3. The slowdown is confirmed by the weaker jobs data published on Friday, and it has coincided with the recent tightening in US monetary conditions. This evidence needs to be weighed carefully by the Federal Reserve, which still appears surprisingly confident about the strength of the domestic economy.
Meanwhile, in the eurozone, the estimated activity growth rate appears to have jumped in recent days to 1.8 per cent, mainly because of the publication of fairly strong survey data by the European Commission. There is little change in growth estimates for Japan (0.5 per cent) and the UK (2.1 per cent).
Troubled Industrial Sector Shows Signs Of Recovery
This month we introduce a new feature that examines the growth of the global industrial sector, with the latest month (September in this case) being estimated from our “nowcast” models. The full set of graphs for all the major EM and DM economies is attached here for reference.
Although the industrial sector is typically around 20-30 per cent of GDP, it is more volatile than the rest of the economy, and it therefore accounts for a large part of the quarterly swings in global activity. Furthermore, the marked weakness of manufacturing in the middle of 2015 raised serious concerns about global recession risks. It therefore offers a good cross-check for our nowcast estimates for overall economic activity.
The most interesting feature of these industrial production figures this month is that the growth rate has now bounced to a monthly rate of 0.2 per cent, up from zero in 2015 Q2. While many commentators have been worrying about industrial growth in China, the main contributor to recent fluctuations in global industrial growth has been the US, where the collapse in the energy sector, and inventory shedding in the manufacturing sector, have had a marked effect. As these negative impacts on growth have faded, the global industrial sector has bounced back a little, which is reassuring.
The full set of regular graphs and tables that are included with this report card each month are attached here.
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