The multi-speed global economy is maintaining a disparate growth performance, a point that has shown up in the run of purchasing manager index and other survey data over the last 24 hours.
In the US, the Institute of Supply Managers index for the services sector fell to 54.4 points in March from 56.0 in February, falling below the market consensus estimate. This was enough, at least in the short term, to temper some of the optimism surrounding the recent run of favourable economic news that has been evident in the US in recent months. Despite the dip in this often volatile indicator, the ISM remains at a level that is consistent with a strong expansion in the world’s largest economy and there is still plenty of evidence in housing and consumer demand to suggest the US economy will growth by more than 3 per cent in 2013.
In Japan, the news was particularly encouraging. The composite PMI, which takes account of both manufacturing and the services sector, jumped to 53.2 points in March from 50.2 in February to overwhelm expectations for a rise to 51.1 points.
This better economic news, plus expectations that the recently refurbished Bank of Japan management will strive to meet its objective of delivering inflation of 2 per cent, saw the Nikkei stock index jump a hefty 3 per cent. There is an expectation in financial markets, driven by the policy agenda of Prime Minister Shinzo Abe, that the BoJ will deliver open-ended bond purchases to flood the economy with cash and liquidity. The expectation, or hope, is that some of this excess liquidity will find its way into the real economy, boosting asset prices and with it consumer prices. Certainly the recent trends in the Nikkei suggest some success in this strategy.
The Japanese government bond market has reacted to the promise of almost unlimited cash flows from the BoJ by driving yields to the lowest level in a decade and they are not far from all-time lows. It is extraordinary that 10-year government bonds are yielding 0.56 per cent while the 5-year yield is 0.13 per cent. But this is the market giving the promised BoJ action to flood the economy with cash some credibility.
The HSBC services PMI in China also rose solidly, to 54.3 points in March from 52.1 points in February to be at a fresh six-month high. An economist with HSBC, Qu Hongbin, said the PMI result confirmed that “a broad-based gradual growth recovery is on its way” implying that the consensus forecasts for GDP growth above 8 per cent for 2013 remain on the cards. Earlier this week, the official manufacturing PMI for China rose to an 11-month high of 50.9 points to support the more upbeat view on China.
The main disappointment of the 'big three' in Asia was for India, which is clearly struggling with a tight monetary policy, fiscal problems and a troublesome current account position. The HSBC composite PMI for India fell to 51.4 points in March, a sharp decline from a reading of 54.8 in February. While the Indian Sensex stock index is still well above the levels of a year ago, it has fallen by around 7 per cent since late January reflecting the ongoing concerns about the growth and policy outlook.
Amid this news, commodity prices have resumed a downward bias. The Reserve Bank index of commodity prices, which was released earlier this week, showed a 1.5 per cent drop in Australian commodity prices in March in US dollar terms, a fall that partly unwinds what was a moderate price lift between October 2012 and February 2013. The March level for the index was a significant 20.9 per cent down on the July 2011 peak in US dollar terms, while in Australian dollar terms, the fall from the peak is 19.5 per cent.
Other commodity prices are also weakening – overnight the price of oil, gold, iron ore and copper were all well below recent peaks. Indeed, the copper price has fallen almost 10 per cent since February while the gold price, at around US$1,550 an ounce, is down around 12 per cent from the September level and it looks like a true bubble that is bursting.
While the softness in the overall commodity price picture is probably driven in large part by a global supply response, something I covered last month (Heavy going for lead-footed commodities, March 12), there may also be an element of global macroeconomic trends with the better economic news skewed towards services and not so much in manufacturing.
There is no doubt that so far in 2013, the global economy has exceeded most expectations in terms of the growth performance, even though there has been a wide gap between the strong and weak countries.
That uneven performance is set to continue through the year although it is very encouraging to see most of the largest economies in the world being on the stronger side of the ledger.