The light at the end of the tunnel for the global economy has dimmed a little in the last few weeks.
Over the weekend, there was more news of a cooling in manufacturing in China. The HSBC and Markit Economics purchasing managers index rose fractionally to 47.9 points in September from 47.6 points in August, but the index has been below 50 points for the last eleven months.
This slowing in the Chinese economy follows a run of other weak data and has been showing up in generally weaker commodity prices. After commodity prices shot higher a few weeks ago on the back of additional quantitative easing in the US, Japan and Europe, the broadly based Thomson/Jefferies CRB commodity price index has dropped 3.6 per cent in the last two weeks. As always with short-term market moves, some caution is needed in looking at fortnightly or even monthly moves, but the fall in commodity prices is noteworthy.
The data flow out of the US has been mixed after earlier signs of a stronger uptick in housing. Consumer spending remains soft, despite a pick up in sentiment. Business activity has faltered in a range of recent surveys and durable goods orders are a bouncing around a weak trend. The labour market indicators are neither here nor there, meaning when the September jobs data are released this Friday, employment is likely to have risen by a mediocre 125,000 and the unemployment rate will likely be pinned above 8 per cent.
In Europe, all economic indicators suggest the recession continued into the third quarter. This current weakness is not helped by a stormy policy environment for the political leaders and the ECB is trying its best to solve Europe’s ills. Indeed, despite the positive policy action from the ECB last month, many private sector economists are forecasting GDP growth to remain below 1 per cent throughout 2013.
Given the fallout from the global economic crisis, it was always going to be difficult to predict just when and how the recovery would show up. With the most recent easings in policy, there was always going to be a lag between the policy changes were made and started to work on borrowing costs, confidence and then with a further lag, economic activity.
It is impossible to judge how quickly these policy settings will take to work or indeed, as some of the more bearish analysts suggest, whether they will work at all.
There are some good reasons to err on the side of optimism, even if it is over a longer rather than shorter run time frame. The open ended nature of the recently announced QE and bond buying from the ECB, and US Federal Reserve in particular, will in time support economic growth and inflation, which is of course the intent of the policies.
Economic growth will pick up because central banks will make sure it does.
Here’s the rub for the economic pessimists. If it turns out that the US economy, for example, is still sluggish in a few months, the Fed will keep buying mortgaged backed securities and other bonds as it keeps yields down and maintains workable liquidity in the market.
If a few months after that economic activity is problematic, the Fed will keep buying mortgaged backed and other bonds and so on and so on until no more medicine is needed. It might take time and a fair bit of action from the Fed, but it will at some stage work.
In Europe, where the problems are a little more acute than in the US, it is a similar situation with the ECB effectively bankrolling the problem countries budgets for three years, a time frame that it hopes and indeed expects that these countries fix their budget messes. The euro amount of potential ECB bond purchases is unlimited.
All of which brings the debate back to when the recovery will come, not if it will come. It also begs questions of what to look for as early indicators of the recovery gaining traction. The most obvious one would be commodity prices which will move higher is there is a trend improvement in the global economy. The rise needs to be broadly based and not simply a function of US dollar weakness.
Another obvious signal will be a sustained and solid rise in share prices. Stock markets generally anticipate turning points in economic cycles three to six months before they occur. In a strong economy, firms make profits and when firms make profits their share price rises.
All of which comes back to the slightly disconcerting trends in the last few weeks. Lower commodity prices and a tick lower in stock prices is not what the growth optimists or indeed central banks around the world want to see.