Manas Chakravarty
Markets across the world have suddenly been spooked by fears of a growth slowdown. Here’s what the Reserve Bank of India said in its monetary policy statement a few days ago: "…global economic activity has shown increasing signs of weakness on rising trade tensions. Among advanced economies, economic activity appears to be slowing in the US in Q42018, after a buoyant Q3. The Euro area growth lost pace in Q3, impacted by weaker trade growth and new vehicle emission standards. The Japanese economy contracted in Q3 on subdued external and domestic demand."
The RBI said growth was also slowing in some emerging markets, most importantly China. For India too, there have been warnings of lower growth after the September quarter gross domestic product growth came in lower than anticipated. Fitch Ratings has been the latest to jump aboard the bandwagon, reducing its estimate of India's GDP growth this fiscal from 7.8 percent earlier to 7.2 percent.
Is growth really slowing? The November data from the widely cited Purchasing Managers Survey shows the Global Composite Purchasing Managers’ Index (PMI) to be at a 3-month high. The Composite PMI is a measure of private sector economic activity in both manufacturing and services. A reading above 50 denotes expansion, while one below 50 shows contraction from the previous month. In November, the Global Composite PMI came in at 53.2, compared to 53 in October.
In the US, fears of slowing growth are being reflected in an inverted yield curve, with some short-term yields becoming higher than long-term ones. However, the Composite PMI for the US came in at 54.7 in November, showing that expansion continues to be strong, although it was a tad lower than October's 54.9.
Economic activity in the Eurozone too continued to expand, with the Composite PMI at 52.7 in November, compared to 53.1 in October. The same was the case with Japan, with the index edging slightly lower in November.
Among emerging markets, China's Composite PMI went up from 50.5 in October to 51.9 in November. And in India, growth in November has been robust.
Is it just a growth scare then? Perhaps not. While growth is still strong, the momentum has eased in many parts of the world. For example, the Eurozone PMI, although still in expansion mode, was at its lowest level since September 2016. While the PMI picked up in China in November, the fact is that the October reading was a 28-month low. In the US, the PMI survey said, ‘More tentative forecasts for the year ahead were registered by both goods producers and service providers, with the former raising concerns surrounding the sustainability of the current sequence of new order growth.’ New orders in the US were at their weakest in thirteen months. In India, although business confidence improved in November, it was a bounce from a 20-month low registered in the previous month.
What’s the upshot from this rather brief tour of the world economy? The point that comes across is that while growth may still be robust, the loss of momentum is leading to a fall in business confidence. This is reflected in the Future Output sub-index of the Global Composite PMI falling sharply in November to 62.1 from 63.7. Note that the forecast is still for expansion, albeit a relatively muted one.
There are many reasons for businesses losing their nerve, ranging from the fading of fiscal stimulus in the US, tighter global liquidity, the trade war, weakness in Chinese growth et al. The Global Composite PMI survey says, ‘Business expectations regarding the outlook for economic activity during the year ahead dropped to the lowest level since September 2016.’
It is this loss of confidence that is being reflected in the markets.
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