Janus Henderson Investors: Global recovery not yet assured

Simon Ward

The global manufacturing PMI new orders index recovered further in November but the current reading of 50.4 compares with a long-run average of 52.6 and suggests anaemic growth of industrial output – see first chart.

The PMI increase, moreover, was not mirrored by an alternative G7 plus E7 indicator that combines forward-looking components of national business surveys (ISM for the US, NBS for China, Ifo for Germany etc). This indicator bottomed in September but moved sideways below 50 in November – first chart. 

Near-complete October monetary data, meanwhile, confirm that six-month growth of G7 plus E7 real narrow money slipped back to 2.3% from a downward revised 2.6% in September. This is above the range between December 2017 and August 2019, suggesting stronger economic momentum in mid 2020, but a rise through 3% is judged here to be necessary to confirm a “full” recovery later next year.

G7-only six-month real narrow money growth is above 3% (3.2%) but E7 growth remains well below (1.1%), mainly reflecting Chinese weakness – second chart.

As previously discussed, Chinese money trends lost momentum from Q2 as regional banking woes led to a tightening of credit conditions. Private firms still appear to be having difficulty accessing external finance: the corporate financing index component of the Cheung Kong Graduate School of Business survey weakened slightly further in November – third chart.

The global stockbuilding cycle probably bottomed in Q3 but a recovery may be delayed until H1 2020. While inventories have been slashed in some economies, notably Germany, the US is lagging (with the Q3 rise in inventories revised up last week) – fourth chart.

Recent weakness in US commercial and industrial lending, however, hints at a large stockbuilding drag on Q4 GDP – fifth chart.

The completion of German inventory adjustment could result in a rapid reconvergence of the country’s depressed manufacturing PMI with regional / global averages, a possibility also supported by the alternative Ifo survey – sixth chart.