This blog presents the first in a regular series of monthly report cards on the state of global economic activity. The real time activity growth rates are derived from the latest Fulcrum “nowcasts”, based on dynamic factor models. These nowcasts, estimated by Juan Antolin Diaz and colleagues, combine a very large number of different statistical releases to identify a single growth “factor” that is assumed to be driving the economies in question.
The Fulcrum models build on the pioneering work of Lucrezia Reichlin, Domenico Giannone and others at the ECB and LBS. (Professor Reichlin’s subscription service is available here.)
As a San Francisco Fed study pointed out last week, GDP forecasts for the year ahead are not only “persistently optimistic”, but they are typically very significantly affected by the actual GDP data for the most recent quarter. Financial markets are therefore sensitive to quite small swings in activity data. It is important for investors to track the data flow, much of which is confused and contradictory, in the most efficient manner possible. We believe that factor models are helpful in doing this.
Last week, the markets shifted slightly away from pessimism about global growth, with bond yields, commodity prices and US equities all rising for the first time in quite a while. This is in line with the recent information flow, which seems to be be moderately encouraging.
A pick-up in activity in both the Eurozone and Japan is countering, and perhaps more than offsetting, a slowdown in the US. Global retail sales volume is rising strongly as oil price effects feed into consumer confidence, and manufacturing sectors seem to have eliminated the excess inventories that accumulated late last year. In the advanced economies, growth is now running at a significantly above the trend rates derived from the models. But in China, the progressive and gradual slowdown continues.
We show the recent history of results from these models, updated daily, in the graphs below. In future, this blog will update these results soon after the global PMI surveys and the US jobs data are published in the first week of each month.
The key points from the nowcasts for the advanced economies (AEs) at present are as follows:
- The growth rate for the AEs as a whole has been broadly stable at around 2.5 per cent in recent months. There was a temporary dip to about 2.1 per cent in early January, which caused some concern, but this has now been fully reversed, and growth seems to be moving slightly higher. The demand benefits from the oil shock may be starting to boost the growth rate in consumer sectors, but there are clearly some headwinds from lower oil investment, and weak exports to the emerging economies.
- The US economy has recently slowed from a growth rate of about 4 per cent last November to about 3 per cent now. This should probably be interpreted as a return to a sustainable rate of expansion, after a temporary boost to GDP from the weather-related catch-up in 2014 Q3 and Q4. The February jobs data suggest that the economy is on a firm recovery path that is probably strong enough for the Fed to tighten in mid year. The bond markets may need to adjust further in coming weeks to price in this likely Fed tightening.
- There has been a little-noticed recovery in growth rates in the Eurozone, from about 0.5 per cent in November to 1.2 per cent now. This has been seen in almost all economies, including Germany, where the model’s estimated recession probability for 2015 has dropped to 18 percent, from over 30 percent late last year. Spain is particularly robust, with growth running at 3.3 per cent. There is no sign that Eurozone consumption is being postponed as inflation expectations fall; in fact, the reverse. The ECB has eased considerably over the last 18 months, the exchange rate has fallen, and the banking sector is normalising. These policy changes are now beginning to feed into the growth rate.
- Growth in Japan has jumped to about 3 per cent recently, suggesting that the very weak data in the latter months of 2014 were due to distortions caused by the sales tax increase last spring. Japanese activity data are volatile, so we need to be wary of a false signal, but for now the economy appears to be rebounding.
- The UK is holding steady around 3 per cent growth. This is very reassuring after the slowdown to around 2.3 per cent in November, triggered by weakness in the housing sector and in the Eurozone. The resilience of UK growth is surprising to many, but it shows no signs of losing momentum at present.
- The growth rate for the AEs, at 2.5 per cent, is now running about 0.7 per cent above the trend growth rate, which the models estimate at 1.8 per cent at present. All three of the major geographical blocks – North America, Europe and developed Asia – are growing significantly above trend at present. Therefore the output gap, which still remains large, is closing at a fairly rapid rate.
- The latest estimates for trend growth reflect the damaging impact of the financial crash, and are significantly below longer term historic rates. It will be interesting to see whether there are upgrades to the models’ estimates of trend growth if actual GDP growth remains firm in coming months.
Finally, a word about China. Fluctuations in Chinese activity are particularly difficult to track, because of the unreliability of economic data, especially with regard to seasonal adjustments. Arguably, however, the confused state of the official data might make the nowcast methodology even more useful in identifying important changes in the growth rate.
According to the model, the growth rate in activity has slowed markedly during 2014, and now stands at about 7 per cent. This is in line with independent estimates of the annualised growth rate in real GDP in 2014, but is higher than the very volatile official estimate of quarterly annualised GDP growth, now standing at 6.1 per cent. The nowcast growth rate has not yet broken below the range established in the past 3 years, but it is still dropping as the manufacturing sector continues to slow.
As John Authers points out, China definitely represents the most significant downside risk to global growth at present.
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