© Alphaspirit
05/03/2024
The message at TPM 2024 this week from S&P Global’s Economic Outlook was decidedly mixed.
Although the global economic outlook is beginning to brighten, said S&P Global’s chief business economist, Christopher Williamson, he warned delegates that “global dangers are at a level we haven’t seen since the end of World War 2”, and that a recently revised economist forecast must be taken with “a pinch of salt”.
The revision by S&P Global, which upped its global GDP forecast for 2024 to 2.5% from 2.3%, was motivated by trends seen in its most recent Purchasing Manager’s Index (PMI) data. According to Mr Williamson, its overall services and manufacturing PMI number, reached by aggregating the results of a monthly survey sent to 28,000 companies, has begun to rise over the past the past three months, providing an indication of accelerating economic growth.
That increase, in sharp contrast to the decline recorded at the start of last year, has mostly been driven by services. Conversely, “manufacturing output has been in a period of real malaise, it has barely seen any growth at all”.
This isn’t the first time the discrepancy has been observed. Back in early 2023, the post-pandemic opening-up of countries like China triggered a short-lived surge in tourism and recreational spending, while demand for manufactured goods remained soft. Promisingly, recent growth seems more stable, driven by outsized performance in financial services. Wealth has begun to trickle down and bolster consumer spending, which Mr Williamson hoped would spur manufacturing demand.
Researchers have begun to see signs of the inventory cycle turning, with demand for raw materials picking up. Mr Williamson said record high stocks built up during the pandemic had largely been whittled down.
Regionally, there are few signs of recessions worsening. Inflation seems to be levelling off, with the overall PMI charge for goods and services, an index that “tends to move ahead of consumer data”, is now down to a three-year low, albeit still above pre-pandemic levels.
Mr Williamson attributes the sluggishness of the shift to the rigidity of European labour markets. The inflationary impact of wage costs has been particularly pronounced in the UK, where the workforce has enjoyed greater bargaining power in the wake of Brexit.
Across the Atlantic, the US has effectively achieved its PMI targets.
These numbers need to fall further for rate cuts to materialise. Mr Williamson noted that unforeseen “stickiness” of inflation had motivated analysts to pare back a bullish early prediction of central banks to cut rates in March. Cuts are now expected in May in the US at earliest and June in Europe, and by 100 basis points rather than 160.
The pace of recovery might be slower than initially hoped, and although the data suggests a brighter future is probable, there are caveats.
Firstly, as former US secretary of defence Robert Gates observed in his keynote address, the world is on a knife edge.
He highlighted the war in Europe, four conflicts in the Middle East — “Houthis, Gaza, Hezbollah in Israel and the militias in Iraq and Syria” — in addition to simmering tensions in the South China Sea and increased aggression from North Korea.
Secondly, in a major election year, wins for populist politicians will likely lead to protectionist policies, including trade-dampening sanctions and tariffs.
Thirdly, if further crises do arise, the fiscal support governments can provide is limited due to the debt built up over the pandemic. “The money’s simply not there.”
The upshot: S&P Global’s risk index is at the highest level in 25 years. In the ominous words of Mr Gates, “complacency will be your enemy”.
