- It might be hard to swallow considering the wall of negative views from pundits, but good news in the US labour market and an uptick in German manufacturing are adding to signs of recovery
Could we be heading into a sweet spot of stronger recovery, better job creation and lower inflation in the next year? It might be hard to swallow considering the wall of negative views coming from economy watchers, but in the United States at least there are some clues to better times ahead.
Last week’s US employment data for December showed improving labour market conditions with positive hints that wage inflation might be on its way down. This comes against a backdrop of the US economy expanding at 3.2 per cent in the third quarter of 2022.
Even money markets are starting to moderate their expectations for further US Federal Reserve interest rate tightening. It’s not quite a Goldilocks moment, but it’s better than the doom and gloom predictions which have gripped markets in recent months. Much depends on the outlook for global economic confidence and whether the world’s business community can stage a comeback after a tough 2022.
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There were early indications of recovery in the latest raft of global manufacturing purchasing manager indices (PMI) issued last week. However, it will take more solid performance from the US, China and European economies before the markets are convinced about the case for sustainable global growth.
With so much recent bias about the risk of recession, the challenge will be spotting early shoots of recovery as they emerge.
One big surprise in last week’s data was the improvement in the outlook for German manufacturing. The manufacturing PMI, published by S&P Global, rose to 47.1 in December, from 46.2 in November, the best reading for three months. December’s number was still shy of the 50 threshold, marking the difference between growth and contraction, but it’s a sign that German industry could be turning a corner.
Companies are reporting an easing in supply-side frictions, resilience in the jobs market and lower inflationary pressures. Confidence about future output is at its highest level since last March.
Germany, like China, is a machine shop for the rest of the world, so there could be some early glimmers of recovery further afield. On the positive side, seven out of the 29 countries surveyed during December reported manufacturing PMIs in positive territory, including India, the Philippines, Russia, Mexico, Colombia and Indonesia.
It’s not quite the one-sided message of doom which global growth detractors convey. Now it’s a case of trying to identify where the scope for recovery for the rest of the world will come from.
The JPMorgan S&P global manufacturing PMI fell to a 30-month low of 48.6 in December. It was below the 50-neutral mark for the fourth successive month but still well above the 39.6 low struck at the nadir of the 2020 Covid-19 pandemic. But the signs are that the rate of decline in the global conditions index is slowing and might even be stabilising.
Global business sentiment may seem battered and bruised, but it is by no means down and out. Factors for recovery in the next few months depend heavily on a let-up in the war in Ukraine, an easing in global inflation pressures and some reassurance that the world is close to the top of the global interest rate cycle.
Clearly there are risks ahead, but there is no sign of imminent collapse in sentiment. The International Monetary Fund has warned that up to one third of the global economy would slip into recession this year, but the odds are that most of the world is heading into something closer to a moderate downturn rather than the major meltdowns suffered during the 2008 financial crash and the Covid-19 pandemic.
The world needs some time to adjust to tighter monetary conditions and the rise in borrowing costs. As long as global policymakers don’t rush to withdraw fiscal reflation at the same time, the world should come out relatively unscathed.
On the positive side, the Fed should be in a position to cut interest rates later this year as inflation pressures ease. Lower energy prices should ease the cost-of-living crisis, and growth expectations might well surprise on the upside as global supply-side shortages unwind. More importantly, a breakthrough for peace in the Ukraine conflict would do wonders for global well-being.
It might be easier to give in to recession fears, but the bigger challenge will be embracing nascent recovery down the line. It should mark a new beginning for better times.
David Brown is the chief executive of New View Economics
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This article originally appeared on the South China Morning Post (www.scmp.com), the leading news media reporting on China and Asia.
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