Continued Headwinds Undermine Global Growth
Portfolio Manager, Cross Asset Solutions
Over the last month, growth conditions have deteriorated, and the global economy now looks to be expanding near its potential rate. The slowdown has primarily been driven by the US, where a combination of constrained household spending and worsening business sentiment has slowed the world’s largest economy. While the current level of growth is not worrisome on its own, the forward picture raises concerns: real wage growth in the US is negative at the same time that savings have been drawn down. Business sentiment remains on a downward trend, and the Fed is likely to begin its tightening cycle this week. If that was not enough, the continuation of the Russia/Ukraine conflict creates, in addition to the humanitarian cost, further macro uncertainty: disrupted trade, higher commodity prices, and isolation of the world’s eleventh largest economy.
Can’t Buy Me Love
The global economy looks to be growing at potential
Global growth had been steady at an above-potential rate for most of Q4 2021 and the start of this year, thanks to a strong US expansion and a turn-around in the Chinese economy. However, over the last few weeks, the US economy looks to have lost some of its footing, weighing down on global growth. Figure 1 shows our Global Growth Nowcaster, as well as the Nowcaster for the world’s three key economies, highlighting the recent descent of the global indicator. Importantly, Eurozone growth has thus far remained robust, as all of its underlying components are at or above their long-term levels. Supportive monetary policy from the PBOC has also helped to boost demand from China, which now looks to be growing at an above-potential rate.
Figure 1: Growth Nowcasters
Source: Bloomberg, Unigestion. As of 09.03.2022.
The impact of the deceleration in the US economy is also apparent when examining the underlying components of the Growth Nowcaster. As Figure 2 shows, the decline from the start of the year is largely driven by household consumption, which has been subdued for some time, business production expectations, and employment, as the jobs market normalises. Moreover, tighter monetary policy does not bode well for the housing sector, which is one of the largest contributors for now.
Figure 2: Global Growth Nowcaster and its Components
Source: Bloomberg, Unigestion. As of 09.03.2022
Importantly, the diffusion index of the Growth Nowcaster – the share of underlying data improving – has been 50% or lower since July of last year. Put another way, the majority of growth data has been deteriorating for seven months, suggesting the overall indicator is likely to continue falling.
US households: wage growth lagging inflation, putting further downward pressure on growth
While the job market in the US has tightened significantly, with the unemployment rate down to 3.8% (versus a pre-Covid low of 3.5%), wage growth has not kept up with the massive pickup in inflation. Thus, households have seen their wages pay for less and less goods, creating a significant headwind for consumption to support the economy. Figure 3 puts real wage growth today in a longer-run perspective. While the picture is less dramatic than the 1970s, the inability of household incomes to keep up with inflation creates downward pressure on growth (via lower consumption and amplifying the risk of stagflation) or corporate margins (via higher labour costs). Neither alternative is a positive one for growth-oriented assets such as equities.
Figure 3: YoY Growth in Average Real Hourly Earnings for Private Nonfarm Payrolls
Source: Bloomberg, Unigestion. As of 10.03.2022
Of course, households could draw down on savings or use credit to finance spending. However, personal savings are back to their pre-Covid levels while tighter monetary policy will likely constrain credit growth.
Production expectations declining in US, stable in Eurozone
The other key element constraining growth has been the business environment, especially in the US, where the combination of the omicron surge at the end of last year, expectations of tighter monetary policy, and fading fiscal impulse have driven sentiment lower. Figure 4 shows the decline in two key macro data series: the ISM Services PMI and the month-over-month change in the US Conference Board’s Leading Indicator. While business investment remains supportive (see Figure 2), a continuation of this trend would likely lead to lower investments, as businesses scale back investment activity in the face of potentially lower demand.
Figure 4: US and European Production Expectations Surveys
Source: Bloomberg, Unigestion. As of 10.03.2022
In contrast, production expectations among European businesses has remained firmer, helping to support the growth dynamic in the Eurozone.
Russia/Ukraine conflict adds further uncertainty
The slowing growth dynamic is even more worrisome as the Russian/Ukraine conflict continues to unfold. In addition to the direct impact on each country’s economy, Russia’s role as key exporter of commodities, from energy to base metals to agriculture, has a significant impact on global growth. These commodities have surged since the Russian invasion, with their respective Bloomberg indices up 40%, 33%, and 23% year-to-date. As discussed last week, this run-up in commodity prices often precedes a recession, as households reduce real spending and corporate profitability declines, dis-incentivising investments, and leading to demand destruction.
While the risk of recession in the near-term remains low, it has risen significantly and will likely continue to do so, given the broader monetary and geopolitical context. Indeed, our Global Growth Newscaster, a fast-moving indicator based on news sentiment that tends to lead our Nowcaster especially around turning points, has shifted into high recession risk territory. By construction, this signal is volatile, but if present conditions persist, we would expect our Growth Nowcaster to also shift into the same direction, leading our dynamic allocation to become more defensive as a result. In the meantime, we maintain a cautious allocation, with lower deployed risk that is selective in its modest growth exposure.
World Growth Nowcaster
World Inflation Nowcaster
Market Stress Nowcaster
- Last week, our World Growth Nowcaster ticked slightly lower on data from the US and China.
- Our World Inflation Nowcaster moved slightly lower, as many economies saw reduced, but still high, inflationary pressures.
- Our Market Stress Nowcaster moved up slightly, as volatilities grinded higher.
Sources: Unigestion, Bloomberg, as of 11 March 2022
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