Europe drives world econ higher

 We now have all the PMI and ISM data for October.   

The GDP-weighted averages for the Big 8 manufacturing and services PMIs are shown below.  The Big 8 are:  the USA, the UK, the Euro zone, Japan, China, Brazil, Russia, India.  Together, they make up roughly 70% of world GDP.  

Services rebounded sharply in October, pushing up the average of the services and manufacturing PMIs (the green line in the chart)   Most of that rebound was in Europe (from 51.3 to 53.0) and in the UK (from 50.8 to 52.3).  Russia also rebounded, from 47 to 51.7.

While the recovery in manufacturing has been sluggish, services have been surprisingly strong.

Historically, the main drivers of the business cycle have been manufacturing and construction, with services following, because of the inventory (stocks) cycle.   So far, the recovery in manufacturing has been weak, but services have held up, which is interesting.   This suggests that Trump's trade war is affecting manufacturing, but since tariffs haven't been set on traded services, it is not affecting services.  The problem is: how long can this disconnect continue?  If manufacturing goes back into recession, services will surely in the end follow.

Business confidence in the Big 8 is picking up too, also driven mostly by surging business confidence in Europe.

My view of the world recovery and the negative effects of the Trump tariffs has so far been too pessimistic.  Perhaps, like Brexit, it will take a couple of years for the negative effects outside the USA to become apparent---they are much clearer within the US.  Yes, manufacturing is soggy, as the trade war has (some) effect.  But services are responding in the normal way to the fall in global interest rates over the last year.

So far, though the recovery has not been steep, it is clear that the world economy is picking up.  How sustainable that is, isn't clear.

[As usual, the data come from a variety of sources, including S&P Global, the ISM, and the OECD, among others.  They are my calculations for extreme-adjustment and the GDP-weighted indices]

Is business confidence pointing towards a downturn?

 Yesterday, I posted a piece about global business confidence.  I am in the process of expanding and altering my databases, and adding more business and consumer confidence time series as well as revising  my time series processing programs.  

The time series I plotted was a composite of two different business confidence indicators, one for the USA and one for OECD Europe as a whole.  

I've since added some more business confidence series, which has allowed me to calculate business confidence indicators covering more of the world.  

The chart below shows G7 and G11 industrial production and business confidence.  

20 years ago, the G7 (the USA, the UK, Germany, France, Italy, Japan and Canada) were key to the world economy and served as a good proxy for it.  But other countries grew fast, and we needed to take them into account.  So we got the G11:  the original G7 plus China, India, Russia and Brazil.  Together they make up roughly 2/3rds of world GDP.  Also on the chart is G11 business confidence.  (All the indicators are my calculations, using weights derived from purchasing power parity GDPs.)

As can be seen, G7 and G11 industrial production move in similar cyclical patterns (which is what the deviation from moving trend is designed to portray) but in fact the G11 growth rate has been much higher than the G7.  Over the last 20 years, the G11 growth rate has been a full percentage point per annum higher than the G7, and over the last couple of years, the gap has been even higher.  

What's happening now is that G11 business confidence is falling, while G11 industrial production is picking up steam, because China is recovering, even while G7 IP is slowing.  Clearly, business confidence tends to lead the cycle, turning down before the economy does, and also up before it does too, though the lead at the top of the cycle is longer than at the bottom.  So this divergence now between G11 IP and business confidence is very interesting.  The business cycle gave a false signal in 2004, and so it's not infallible.  But remember, it leads the cycle, by between 6 months and a year, so its decline is yet to be fully reflected in economic activity.

We are, I think, at a cusp, and conventional indicators might not work too well, because the uncertainty and disruption caused by Trump's tariff follies are unique in my long professional experience.  Logic leads me to believe that the combination of extreme uncertainty and big blockages to world trade will lead to rising inflation in the US, and lower growth everywhere.  But we won't know for a few more months, by when it will be too late. In the meantime, the big question is how much US tariffs will damage world growth outside the US, especially in China.  I am following the latest releases of economic and financial data in a way I haven't for many years. 

In response to the question I pose in my title for this post, the answer is most likely yes.

Click on the chart to enlarge it.

Business confidence slides

 This is the average of US and OECD Europe (which excludes a few European countries, the most notable of which is Russia), which represents roughly half the world's GDP.

Note how it had started to rise, and then as Trump's tariffs impacted, it fell.  Business confidence tends to lead the cycle.  

Of course, any indicator may change direction, but if this downtrend continues, it will signal at best sluggish growth, at worst recession.

I'm busy extending the business confidence series in my data banks, and will add more countries to this calculation to get a more representative picture of global trends.

I need to work on my font sizes in my charts too!

I'll keep you posted.

Europe's recovery

For the most part, PMIs tend to move more or less in line with business confidence.  This particular business confidence survey just covers industry, like the PMI (there is also a services PMI, not shown).  Like the PMI, the business confidence index is a weighted average of several survey results:  production trends, order books, export order books, stocks, and production expectations.   The PMI uses slightly different surveys, is taken at a different time of the month, and different weights, so one would expect to see some differences.  

But the PMI is rising strongly and is almost above the 50% "recession line", while business confidence had started to rise, but fell sharply in June.    So which should we believe?   The PMI includes employment, whereas the business confidence index does not.   But the employment subsector of the PMI also fell in June, though only slightly.  So that can't explain the divergence.  

Some other clues.  Euro Area (countries which use the Euro currency) industrial production picked up over the last year to March, but fell in April, probably because of Trump's tariffs.   The volume of retail sales in the Euro Area fell sharply in May, after recovering over previous months.

My perspective is that Europe has indeed started to recover, but the tariff mess has paused the recovery.  

The EU makes up about the same percentage of world GDP as the US does, around 22%.  If, as I think, the US goes into recession and the European recovery falters, a global recession will be inevitable.

Australian recovery probably OK

This chart shows YoY changes in my Australian leading and coinciding indices.  The leading index has been brought forward by 6 months, which gives us a forecast of what is likely to happen to the economy.  It suggests that economic activity is likely to accelerate.

However, my leading index is based on indicators which would normally lead recoveries and recessions.  There is no recent precedent for the damage wreaked by a trade war, and worse, by random changes in tariff levels, up one week and down the next.  These would be picked up by confidence indicators, both business and consumer.  But although consumer confidence rose sharply from 2023 lows, it has merely levelled off since January.   Business confidence is still holding up.  The most up-to-date activity indicators, the PMI series, are, so far, still rising.

Unlike the data in the US, which are already suggesting a slowdown at best and a recession at worst, Ozzie data still point to a recovery.   I'll go with that for now.

Extending PMIs back in time

For many countries, the PMI indicator is very useful.  They are released on the first few days of the months for the previous month, and they give a very good idea of the business cycle in each country.  For some countries, I have PMI data going back 25 years, for others just 10, or less, either because the people who compile the PMI indicators (S&P Global) haven't been doing it for longer than that, or because I just don't have the data (you have to be a subscriber to get back data).  But if you want to analyse economic cycles, it helps a lot to have a long run of data.   

What you can do is use other business surveys to estimate back data for the PMIs.  

The chart below shows business confidence for Austria compared with the PMI data.  You can see the close correlation.

Here's a similar comparison for Turkey, where the business confidence time series goes back to 1987, but the PMI (my data) only goes back to 2012.

I'm working on similar analyses for other countries, which will allow me to include a few other countries in my small-country world PMI  ("Small 11", which will soon expand to the "Small 14")

Incidentally, the charts show that Austria's economy is falling more slowly (remember, the PMI/Business confidence surveys lead), pointing towards an upturn in Europe later this year, while Turkey's economy is slipping into recession after their Central Bank raised rates dramatically after the president was re-elected. (He wouldn't permit it before.)  Interest rates in Turkey are far from peaking.

Austria: PMI vs Business Confidence

 I mentioned in my last post that business confidence and the PMI in Austria are well correlated.  

Here's the chart.

click on image to see it more clearly

Austria's PMI slumps to a new low

As I've mentioned before, the state of Austria's economy gives a good guide to how the whole of Europe's going.  Exports equal 56% of Austria's GDP.  If manufacturing is slumping in Austria, it's mostly because Europe is sliding.  Compare the difference here with large continental economies like the United States. 

After extreme adjustment, Austria's PMI is now lower than during the Covid crash.  That's because my extreme-adjustment algorithm regards a downward spike lasting just 2 months as an aberration (outside the 2 sigma limit for the error term, if you want to get technical).    Business confidence, which, as you'd expect, correlates reasonably well with the PMI, recovered in December, January and February, paralleling the bump in the PMI, but fell again since then.   

I remain convinced that there will be a European recession.  We've had a mini bounce in the European economy, and that's now over.

[See also Austria: PMI vs Business Confidence]

Click on chart to see a clearer image.

Russian business confidence plunges

 Up till now, Russian economic data (at least those that the government continues to publish) have held up quite well.  This has led some commentators to conclude that the government is fudging the stats, which is entirely possible.   Business confidence (seasonally adjusted) plunged in February 2022 when Russia invaded Ukraine, then rallied, but has fallen again this year as the oil price cap and plunging gas sales have started to bite, which is at least consistent with the probable path of the economy.  The government has stimulated the economy with fiscal measures as well as cutting interest rates, and the imposition of tight exchange controls and the prohibition of foreigners selling Russian property and shares have all held the economy up, so that the year-on-year fall in GDP in Q3 was "only" 3.7%.   

Oil and gas revenues fell 40% year-on-year in January:

Russia’s revenues from oil and gas exports dropped by nearly 40% in January as price caps and Western sanctions squeezed the proceeds from Moscow’s most lucrative export, the International Energy Agency said on Tuesday.

Russia’s oil and gas export revenues were $18.5 billion in January, 38% lower than the $30 billion Moscow received in January 2022, a month before its invasion of Ukraine, according to IEA numbers shared with Reuters.

IEA Executive Director Fatih Birol said Western measures targeting Russian energy exports had achieved their aims of stabilising oil markets and reducing Moscow’s revenues from oil and gas exports.

“Our expectation is that this oil and gas revenue decline will be steeper in the next months to come. And even more steep in the mid-term, as a result of the lack of access to technology and investment,” Birol told Reuters.

International restrictions imposed on Russia in response to the Ukraine war, including a $60 a barrel crude price cap imposed by Group of Seven countries, have left Russia’s Urals blend being sold at a heavy discount to Brent.

The 27-country European Union also banned Russian seaborne oil imports from December, and has placed sanctions on exports to Russia of technologies needed for oil refining. The United States and Britain have also imposed restrictions on Russian oil imports.

[Read more here]

Only 7% of Europe's oil now comes from Russia.  Building new pipelines, to sell gas into other markets, is possible, but will take years.  And oil and gas make up most of Russia's exports (the government has stopped publishing these data, but we know what is happening from data covering imports from Russia by other countries).  

I think Russian economic data will start to deteriorate from now on.  That's if they continue to be published.  

Small business optimism falls in December

 he NFIB small business optimism index fell in December.   It has a clear lead to the cycle at the top, but is much shorter at the bottom.

Russia PMI and business confidence up

 Business confidence actually fell in December, but it always falls (all that snow) at this time of the year, so my seasonally adjustment program reckons that seasonally adjusted, business confidence rose a trifle.  The headline PMI fell a little, but since it is quite "spiky" I extreme-adjusted and smoothed it, and that showed a rise in December.  

The Russian economy isn't going to fall until the oil price falls sharply, and that will only happen next year as the world tips into recession.  The oil price is down, and the trend is down, but there's still enough foreign exchange coming in to Russia to keep its economy ticking over.

UK business confidence

 After my analysis of Russian business confidence, I also looked at UK business confidence.  This has an even better correlation with the overall PMI  than it does in Russia.  You'd have to conclude from these data that growth is slipping, but remains at the peaks of previous business cycles.  However, *if* it keeps on slipping, you'd be looking at recession in H2 2023, entirely consistent with the rise in the Bank of England's discount rate, as extreme measures introduced to support the economy during covid are withdrawn.