- US economy in a soft patch…
- …but US GDP growth should pick up in the first quarter
- However, risks to US economy tilted to the downside
- World manufacturing remains subdued
US economy in a soft patch…
US GDP growth has been slowing over the past couple of quarters. Indeed, the economy seems to be in a soft patch. The advance estimate of Q4 GDP came in at 0.7%. Most major components were weak, particularly the contribution of fixed investment continued to decline. On top of this the sharp drop of December’s orders and shipments of durable goods suggest that this weakness could continue in the coming months, as a result of the collapse in oil prices and the stronger US dollar.
…but US GDP growth should pick up in the first quarter
Our forecast of Q1 GDP growth is still somewhat firmer though, at 1.8%. Consumer confidence reports continue to trend up and housing market data are signalling modest growth. Moreover, we think that the job gains in January will be sustained at decent levels (180K), giving support to consumption growth. However, we expect January’s job gains to be substantially lower in Friday’s report compared to the 275K reported in December. Part of the slowdown in hiring in January will likely be the result of less temporary workers being hired.
Risks to US economy tilted to the downside
We see some downside risks to our Q1 GDP growth forecast. We think that the low oil prices at the beginning of this year and the instability in financial markets, which resulted in a sell-off in the US equity market will impact financial conditions in the US. If oil prices remain low and the US dollar continues to appreciate at a similar pace as in 2015, this could put further downward pressure on manufacturing and energy related activities. Given the duration of the contraction in these sectors, it is possible that the impact could spill over to the broader economy.
World manufacturing subdued
Global economic growth remained lacklustre at the start of this year. The world manufacturing PMI did edge up in January, to 50.9 from 50.7, but the index remains at very low levels. The aggregate indices for both developed and emerging markets both rose modestly. However, while the former index remains above its historical average, the latter is comfortably below it, signalling that emerging market growth remains particularly subdued. Indeed, from the BRIC economies, only India’s PMI is above the 50-mark associated with healthy growth. Meanwhile, among the advanced economies, there was some convergence in the PMIs, with the eurozone and Japan slowing and the US and UK catching up. The level of the PMI for these economies is now similar and consistent with modest economic growth.
Weak global growth reflects major challenges in a number of key emerging markets (Brazil, Russia and China) the collapse in oil prices, which is currently hurting producers more than it is boosting consumers, and tighter financial conditions. Over time we expect global growth to gradually firm. Central banks are stepping up their reflation efforts, while the drag from oil prices should fade. These factors should also support market sentiment. Domestic fundamentals in the US and eurozone have been steadily improving. Having said all this, risks for the global economy also remain clearly tilted to the downside.