Fynsa
In general, since the second half of 2023, expectations of a further global economic slowdown have been on the agenda, given the drag from higher interest rates for longer, lingering doubts about the Chinese economy after the economic reopening, and less supportive fiscal policy, with the exception of China.
Most recently, these concerns have been accentuated by weaker-than-estimated economic data, particularly in the manufacturing and consumer sectors, which would push global GDP growth to a more trendy pace, estimated by JP Morgan at around 2.3%.The weak economic data, particularly in the manufacturing and consumer sectors, would push global GDP to a more trend growth rate, estimated by JP Morgan to be around 2.3%.
The difficulty with some economic indicators, especially coincident ones, is that they are generally "backward looking" and do not necessarily tell us much about future trends. For this reason, we like to look at more forward-looking indicators such as PMI surveys, which, while they may have some volatility, are also often a predictor of future activity. In this regard, the global PMI for May is particularly interesting, and in contrast to recent concerns, it sends a very different message of accelerating and broadening growth.
According to this leading monthly tracker, growth in economic activity is increasing across all sectors and countries. This has been accompanied by strengthening orders and resilient labor markets. A level of 53.7 in the JP Morgan Global PMI points to 3.4% annual growth in global GDP, one percentage point above potential.
The global PMI rebound is reinforced by the breadth of the recovery across sectors. A wide divergence opened up between manufacturing and services in 2023 as demand moved away from the pandemic-related surge in goods and toward "a post-pandemic desire for experiences" such as eating out and travel. The gap, which peaked at 6.5 points in mid-2023, was the highest observed outside of a recession, raising concerns about the health of the expansion.
Since December, the gap closed, but both indices rose. The rebound in the manufacturing sector confirms more constructive signs for the goods sector (firmer final demand and a decline in inventory drag over the last quarter). Combined with improving service sector growth, this would support that the ongoing economic expansion has fuel to run despite elevated interest rates.
The regional activity is also achieving a better balance. A large regional divergence opened up in 2023 as the U.S. prospered and Europe stagnated. After bottoming out in October last year, Europe's overall PMI has rebounded quickly with another solid increase in May, supporting expectations for a pickup in growth in that region. China's PMI also rose in May, somewhat dampening concerns that the economy is losing momentum.
Of course, a more durable global expansion also underpins the market's expected earnings growth, where consensus estimates point to growth above 10%, the same result we get from estimating it from a global GDP expansion above 3.0%.The consensus estimates point to growth of over 10%, the same result that we obtain when estimating from a global GDP expansion of over 3.0%.
So far so good, but let's remember that a soft-landing or Goldilocks scenario requires both resilient growth and inflation to return to trend. In this regard, the latest PMI data show resilient growth, but defy the view of further disinflation. While there is a slight moderation in the services price component and a modest pickup in manufacturing prices, the still elevated levels of price PMIs underscore the pressures on central banks to remain more restrictive, until further progress is made.
