Global Daily – Global growth fears

by: Nick Kounis , Aline Schuiling

Global-Daily-Insight-2-September-2015.pdf (220 KB)
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Markets weighed down by worries about global growth …

…following a set of soft manufacturing PMIs, led by emerging markets

Meanwhile, decline in eurozone unemployment gains pace

Global growth concerns hit financial markets

Investor risk appetite took another blow on Tuesday as concerns about the global economic outlook intensified. Equity markets headed lower for the second successive session. This erased some of the gains made post Black Monday. US Treasuries and the Japanese yen were the main beneficiaries.

Official China PMI dropped as well

The concerns about the global economy were fueled by a set of weak manufacturing PMIs. China’s official manufacturing PMI dropped to 49.7 in August from 50 in July, taking it to its lowest level since August 2012. This followed in the footsteps of the previously-released Caixin PMI for China.

Emerging markets lead the way

The weakness was mirrored in most emerging market economies, where the aggregate PMI dropped to the lowest level seen since April 2009, at the start of the recovery from the financial crisis. There was also a more moderate slowdown in growth in the advanced economy PMIs, with Markit indices for the eurozone and US slipping. This left the global manufacturing PMI slowing further (to 50.7 from 51 in July) leaving it consistent with very modest growth.

Manufacturing not the whole story

The overall global economy is not as weak as suggested by the manufacturing sector, as services are generally stronger in most big economies. However, manufacturing is the most cyclical part, and there is little doubt that global growth is currently only moderate, while downside risks have increased.

Firmer growth ahead

We see three positives going forward. First, domestic demand in the US and the eurozone has been firming. Second, oil prices have come down, and this could also facilitate an easier monetary policy stance globally. Third, the Chinese authorities continue to take a range of measures to support demand. We therefore see firmer growth ahead.

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Decline in eurozone unemployment gains pace

Meanwhile, the unemployment rate in the eurozone fell from 11.1% in June to 10.9% in July, reaching its lowest level since the start of 2012. The series has been on a modest downward trend since the start of 2013, but the pace of the decline seems to have increased in recent months. This probably reflects the pick-up in GDP growth after 2014Q3, as changes in the labour market tend to follow changes in economic conditions with some delay. Given our scenario of the eurozone economy recovery gaining some momentum in the second half of this year, we expect the unemployment rate to remain on a solid downward path. As a result, it should reach levels that will start pushing wage growth in the eurozone significantly higher in the course of next year.

Looking at the individual countries, the unemployment rate has fallen the fastest in Spain and Portugal since the start of the year. That said, the unemployment rate in Spain (22.2%) still is one of the highest in the eurozone, while Portugal (12.1%) also still has a relatively high rate. On the other side of the spectrum, unemployment in Finland and Austria has risen since the start of the year, reflecting economic weakness in both countries.