A Gradual Economic Acceleration Still Expected
The Economic Rollercoaster is Back on Track (Chart 1)
During 2013, the global economy gained substantial momentum as the quarter-to-quarter annualized GDP growth rates remained above three percent during the final three quarters of the year. But world economic activity grew at only a1.6 percent rate during the first quarter of 2014, largely the result of a 2.1 percent plunge in U.S. GDP. And after encouraging results during the middle two quarters of last year, global economic activity slipped to a 2.0 percent annualized rate in the fourth quarter. Once again, the U.S. (Chart 2) was largely to blame as GDP decelerated sharply from a 5.0 percent advance during the third quarter to a disappointing 2.2 percent gain during the final quarter of last year. More worryingly, growth rates in each of the four quarters of 2014 were lower than the corresponding periods in 2013. Consequently, the 4-quarter moving average growth rate slowed to 2.6 percent during the fourth quarter of last year.
Slumping Chinese Growth Didn’t Help (Chart 3)
The global economic deceleration of the fourth quarter was partially scripted in China. Growth rates fell from a 7.8 percent rate in the third quarter to 6.1 percent in the fourth quarter, which marked the second-smallest economic gain in over a decade. What’s more, China reduced its forecast for 2015 to 7 percent. If accurate, it would mark the weakest economic gain in over a generation.
Elsewhere, the fourth-quarter results, as usual, traversed a wide spectrum. Oil-producing countries were suffering. Brazil and Russia fell into recession. And despite the huge drop in oil prices, several oil-consuming countries were also in recession. They include Greece, Italy and Argentina.
On the plus side of the ledger, West Europe (Chart 4) saw a small economic acceleration during the fourth quarter that took growth rates up to 1.5 percent after a 0.7 percent gain in the third quarter. Japanese progress was more pronounced. A 2.2 percent advance was posted during the final quarter of 2014 after contractions during the previous two quarters.
Diverse Policy Decisions
Whereas the U.S. and the UK have reaped substantial economic benefits from loose monetary policies implemented over the last 5-8 years, the Eurozone has maintained much more conservative policies because Germany consistently resisted the aggressive use of quantitative easing (QE). QE is a central bank policy of stimulating the economy through massive purchases of bonds in the open market. The purchases simultaneously drive down interest rates and inject massive doses of liquidity into the economy. But now the European Central Bank (ECB) will purchase over $1 trillion worth of bonds by September of next year. The newest policy moves follow implementation of negative interest rates (banks charge to hold your money) and over $1 trillion worth of loans to member banks. The ECB, perhaps not coincidentally, raised its forecast for the Eurozone. Growth rates are now expected to accelerate from a 1.5 percent rate this year to 2.1 percent in 2017. It’s not entirely surprising that the bank would publish an optimistic forecast given its policy bet. Still, the West European economy does stand a good chance of achieving stronger results during the next few years as plunging oil prices, for now, provide European consumers with substantially more disposable income for domestic purchases. Our forecast for West Europe largely parallels the ECB forecast.
China’s Forecast is Probably Optimistic
As noted in previous issues, the Chinese economy is overly dependent on investment spending, particularly by state-owned enterprises. But investment outlays have become less productive because, in part, there is substantial overcapacity in Chinese factories. The continuing investment in industrial assets is mandated by political insiders. And although state firms have reduced their share of industrial assets from over 50 percent in 2004 to 38 percent in 2014, investment outlays are many times driven by political decisions rather than market forces. The role of the state has been an impediment toachieving the oft-stated objective of a market-driven economy. The road to reform will be slow. Along the way, unproductive investments will continue to erode economic potential. Consequently, Chinese GDP is expected to decelerate from a 7.4 percent pace last year to 6.4 percent in 2017. And although there will be twists and turns along the way, world economic activity is expected to post gains of 3.4 percent in both 2016 and 2017, up from 2.7 percent last year, as shown below.
Mediocre Gains for Global Manufacturing
The Global Purchasing Managers Index (PMI) came in at 52.0 in February (Chart 5). That was up from 51.7 in December, as shown in the chart below. In essence, the data over the last five quarters show a secular decline that parallels global economic growth. An index in excess of 50.0 indicates that factory activity has been expanding. By that measure, manufacturing output in Brazil, Greece, France and Russia were all contracting in February. The Eurozone marked a 51.0 reading with the help of a booming 57.5 index for Ireland, a 182-month high. China managed a small expansion as evidenced by a 50.7 index versus 49.7 in January. The US report of 52.9 in February represents a continuation of factory downshifting, which began after a 58.1 measure last August.
Mixed Signs of Revival
At long last, the annualized rate of world equipment production hit a new record in December. The $2.27 trillion rate was followed by a normal seasonal slowdown in January. The $2.21 trillion measure for January corresponds to a 4.9 percent 3-month moving average (3/12) growth rate and a 12-month moving average (12/12) expansion rate of 2.9 percent for the month. The latter figure was the highest value achieved since a 4.9 percent gain was posted in August of 2011, as shown in the right chart below. In essence, the electronics industry is showing signs of a growth-rate revival that started in mid-2013.
Exchange Rates Begin to Impact Dollar-Denominated Results
160 electronics companies showed that revenue came in at $2.54 trillion on an annualized basis.
That was 0.1 percent lower than the results posted for the final quarter of 2013. That result was substantially worse than the December 3/12 gain chalked up by our monthly tracking model, illustrated above. The 4.9 percentage point difference is the largest we have ever recorded. The large difference can be traced to the fast-rising appreciation of the U.S. dollar on international money markets. That is, the monthly tracking model is computed using fixed exchange rates, whereas the revenue stream illustrated below is based on fluctuating exchange rates. Consequently, when financial results are translated back to U.S. dollars, the reported revenues take a hit from the reduced value of overseas sales.
Forecasts by year by region are given for annual growth in GDP (Chart 6) and electronic equipment production (Chart 7).