Markets have bounced back in recent weeks following a bad start to the year.
At a global level, equities have almost recovered to their end-2015 levels, even though they are well below the year’s highs. Commodity prices have picked up. Oil has risen by around 50% from its low in late 2015. The CRB raw industrials index has risen almost 10% to levels last seen in September. There are a variety of potential explanations for this turnaround.
Oil has benefitted from Saudi Arabia’s mid-February decision to freeze output. More widely, the US Federal Reserve has become less gung-ho on rate hikes, partly because of market volatility, while the European Central Bank (ECB) has delivered another sizeable package of policy easing measures, indicating that global monetary policy is likely to be looser than previously expected.
The ECB’s modest cut in the deposit rate at its March meeting, combined with comments from G20 meetings, has also reduced market worries that central banks would persist with potentially destabilising attempts to devalue their currencies. Does the recent bounce-back in markets tell us anything about global growth?
While Q1 isn’t quite over and data are thus incomplete, we are approaching the point where we have enough monthly survey and activity information to draw some conclusions about how various economies are shaping up so far this year. The broad picture is that growth has been lacklustre and the outlook is relatively sombre, with emerging markets in particular still struggling.
In developed markets, the picture is mixed. Q1 economic growth has improved compared with the last quarter of 2015, but perhaps not as much as had been hoped. A range of US data have disappointed and suggest the economy has less momentum than we expected. Consumption remains sluggish, as seen in the significant downward revision to January retail sales data and the soft February print. Business sentiment has also taken a significant hit and there are few signs of investment picking up.
There have been some bright spots, such as the housing market and employment. Overall we see US growth in H1 at around 2.0% annualised, up on Q4 2015’s 1% print but a slower pace of expansion than in 2014 and 2015. As the benefits to real income and spending growth stemming from lower gasoline prices begin to fade, we forecast GDP growth will move closer to trend (around 1.5% y/y in our view) by year-end.
While there is a risk that 2.0% annualised growth in H1 and robust employment prompt the Fed to hike rates in June, we believe the US central bank is likely to refrain from raising rates in 2016 and 2017 amid uncertainty about the global economic environment and market outlook, and slower US growth in H2 this year. Even by Japan’s standards, growth was subdued at the end of 2015, and the start of 2016 looks little better.
The economy contracted in the final quarter of last year and the monthly data since then have been lacklustre. January’s 3.7% m/m surge in industrial production is widely expected to sharply unwind with a fall of almost 6% pencilled in for February. Other upcoming data, including the BoJ Tankan survey, will provide more information, but another contraction in GDP looks quite possible in Q1. We see downside risks to our below-consensus forecast for 2016. Weak growth is not, however, just a result of weak external demand; but also stems from the economy’s low trend growth rate.
The remedy for that should be more structural reform, but the authorities continue to rely on macro stimulus measures. These may limit the risk of the economy going back to deflation, but they won’t improve the trend growth rate and could well even lower it by distorting resource and income allocation. The eurozone saw survey data soften in January and February and, even allowing for the limited improvement seen in the March readings, remain below the levels seen in Q4 last year.
However, hard data have tended to surprise to the upside, substantially so in some cases; industrial production jumped by over 2% m/m in January, construction output was up by 3.6% m/m, retails sales were robust through the turn of the year and car registrations, barring a slump in March, are on course for one of the largest quarterly increases since the late 1990s.
All this leads us to believe that despite softer surveys and the downbeat global environment, eurozone growth will pick up in Q1 2016. Our central, judgement-based forecast is for a reading of 0.4% q/q but our now-cast models imply a stronger reading, of 0.5% q/q. In either case, this would mark an improvement relative the 0.3% q/q growth seen in Q3 and Q4 last yea