Will Oz's recession last?

 I talked here about how all the various "PMI" surveys in Australia are falling, and how this prolly means that Australia is already in recession.

What I've done below is to combine all series into a single indicator.  You can see the plummet during COVID in 2020, the strong rebound after, and then a renewed plunge when there was a second lockdown in 2021.  Then the economy slowed as the rebound faded and as Australia's Central Bank, the Reserve Bank of Australia, tightened monetary policy.

We started a new recovery in 2024, but this faltered late last year as the RBA raised rates, and went into free fall with the Iran War.

The chart below shows the relationship between the economy (as represented by the combined PMIs) and the Reserve Bank's "cash rate".  Because I've plotted the RBA's cash rate (which is equivalent to the Fed Funds rate in Australia) inverted, when the blue line rises on the chart, the cash rate is falling on the chart, and when it falls, the cash rate is rising.  The two move in sync except for the COVID crash, when what economists call an "exogenous factor" caused the economy to plunge.  Note that interest rates aren't the only factor shifting the AU economy up or down.   For example, in 2019 (before COVID), the economy slowed because of a slowdown in the world economy.  A tentative recovery had begun, here and overseas, when COVID hit (January 2020).

So, if the RBA doesn't raise rates again, will the economy start to recover?  It's possible.  But remember, the world economy is likely to slow, even if there is a "ceasefire" in the Iran war.  A return to normal will take months, and uncertainty will continue to hamper those famous "animal spirits".  And some countries/regions, in particular, Europe and Indonesia, have already raised interest rates because of soaring inflation.  Indeed, the RBA may yet do the same thing as Australia's inflation accelerates.  And that will slow growth.

My best guess:  growth will slow further for a few more months.  Interestingly, all the growth in Q1 was from investment in AI data centres.  If that bubble bursts, we'll all be in serious trouble.

Happy days.

Europe's economy on the mend

The chart shows the extreme-adjusted PMIs for manufacturing and for services for the Euro Zone (those countries which have the Euro as their currency), and for the average of manufacturing and services, which should be a good proxy for GDP growth.  

The PMIs have now crossed the 50% "recession line", meaning that output is at last starting to expand, in response to interest rate cuts by the ECB.  Will this recovery be derailed?  Obviously, that's a possibility, but Trump's tariff pagaille is likely to be worse for the US than for Europe.  Tariffs will cause a surge in inflation in the US, reducing real incomes and consumption, while also simultaneously delaying further Fed rate cuts.  

Meanwhile, in Europe, the EU has agreed to increase defence spending, and to allow increased debt to pay for it, and you may be sure that the increase in defence spending will go towards European (& perhaps Canadian) rather than American contractors.  Also, the ECB has leeway to cut interest rates again, because inflation is low, whereas the Fed does not.  

The sum of US stagnation/recession, a European recovery, and an Asian upturn (PMIs have started rising there again, after slumping when the tariff war started), means that world growth will improve.  But it won't be a boom, that's for sure.

World economy on brink of recession

This chart shows the Big 8 GDP-weighted PMIs for manufacturing and services.  Just a reminder--the big 8 consists of the US, UK, EA (Euro zone), Japan, China, Russia, India and Brazil, and represents roughly 70% of the world economy.  I have extreme-adjusted each series before I created the global averages.

Some points to note:

1.  The index for manufacturing had started to rise, consistent with the beginnings of a new recovery after the impact of rising interest rates stopped rising in mid-2023, and started falling from Q4 2024.  Since Trump's tariff wars, it has been declining
2. The services index has been falling steadily since December.  Services can quickly respond to uncertainty, for there are no long supply chains, and no inventory.  For example, if you start to worry about the future, you can cancel or postpone your holiday.  That's harder to do with manufacturing.
3. The average of these two, which is a proxy for the whole economy, is drifting lower (though not plummeting) 

The small 15 weighted average PMI, which covers manufacturing only, historically tracks the big 8 quite closely.  However, over the last few months, a big divergence has opened up, as small economies as a whole have slid, though some have done much worse than others.  My small 15 make up 11.5% of the world economy, but there is some overlap with the big 8, since Belgium (0.58%) and Finland (0.18%) are members of the Euro Zone.

Finally, the GDP-weighted PMI for Asia (JP,CH,IN,ID,TW,KR,MY,TH) has plunged.   Together, these countries make up +-28% of world GDP.  Again, this is the PMI for manufacturing only.

The only bright spot:  manufacturing in Europe is picking up.   Will a nascent European recovery be sidelined by the trade war and its associated uncertainty?  Perhaps not, given Europe's economic heft.   And yet, the services PMI is declining.

My judgement is that the world is on the brink of recession. 

World economy slipping back into recession

The chart shows the manufacturing PMI and services PMI and their GDP-weighted average for the big 8 economies.  Each time series has been extreme-adjusted before addition.  The big 8 are:  the USA, the Euro zone, China, Japan, the UK, Brazil, India and Russia.  They represent roughly 70% of PPP world GDP. 

The green line, which approximately represents the whole economy (=+- GDP), is still, just, above 50%, the "recession line".  But only just, and it is very likely that it will cross into recession in May or June.  The trade war might affect the US most, but it will also be bad news for other economies.  And its effects are only just starting.

 You can see the global effect hitting small economies, already.  The chart below shows the manufacturing PMI for the big 8 and for the "small 12" (GDP-weighted avg of Switz, Swed, SA, NZ, Israel, Can, Bel, Aust, Fin, Nor, Den, Thai, ) roughly 8% of world PPP GDP.   (Note:  I am in the process of adding Mexico and Malaysia to the small 12 PMI, which will, obviously, take it up to the small 14.  Duh.)

More or less everywhere you look (except Africa as a whole) PMIs are slumping.   The conclusion is obvious.

Big 8 PMI picking up

Which means that the world economy is picking up.   Manufacturing is strengthening, while services are stable.

No change from my previous judgement that the world economy is lifting out of the doldrums, but the rise is not (for now) going to be rapid.  Trump's tariffs and the likely trade wars complicate the picture, with the US likely to show higher growth and higher inflation, while growth in the rest of the world will be reduced.  

Both manuf and serv PMIs are extreme-adjusted.  The "Total"
(whole economy) is an unweighted average of the two.

World econ remains sluggish

The chart below shows my calculation of the year-on-year change in world industrial production, compared with my calculation of the aggregate PMI for the big 8 economies (USA, China, Euro zone, UK, India, Russia, Brazil, Japan).  Both time series are extreme adjusted, to reduce/eliminate up or down 'spikes'.   Since these are derived from very different surveys, the fact that they correlate so well indicates that they are a true picture of what's happening to the manufacturing side of the economy.  I'll be updating my estimates for big 8 PMI in a day or two (S&P Global released the remaining data I need today)

The world economy remains sluggish, though when I was updating the 60-plus underlying time series used to calculate world industrial production, I did notice a few green shoots.  

I'll be doing a piece on Trump's tariff plans and their impact on growth and inflation shortly.  My preliminary take on them is that they will increase inflation while also reducing world growth overall.  So any recovery predicated on falling interest rates (the global interest rate cycle has clearly peaked) will likely be reduced.

click on chart to enlarge

World econ struggles on

 This chart shows my calculations for the big 5 whole-economy PMIs.  "Whole-economy" means the unweighted average of manufacturing and services PMIs; "big 5" means the GDP-weighted averages of the USA, UK, Japan, Euro Zone and India, about 53% of world GDP; and each individual PMI has been extreme-adjusted before they were added together.  Since PMIs are a diffusion index, i.e., they measure whether sales, employment, etc., are up or down on the previous month, 50% represents the "recession line". If the PMI is below 50%, more than half of all component series are falling, while the reverse is true if it's above 50%.

In November, the big 5 average PMI was 50.9, fractionally down from October's 51.  Remember that these November data are "flash", i.e., provisional estimates, so will most likely be slightly revised.  However, in the past, revisions have been small, and in different directions for different PMI indices, so that revisions for the multi-country averages have tended to cancel out.

Conclusion:  the world economy is not in recession, but it's only growing slowly, with no signs of an imminent pick-up.   Within that, Europe is still in recession, the UK has gone back into recession after a brief blip, but the US is picking up.  No doubt falling interest rates globally will boost the world economy, but the impact of interest rate changes on the economy tends to lag, by at least a year.  I'd be surprised to see accelerating world growth before mid-2025.  I'll keep you posted.

World Econ still above water

I've been distracted by visits interstate to friends and relatives.  And then, cast down by the triumph of vicious stupidity in the US.   So, here (with a bit of a delay) are my GDP-weighted calculations of the services and manufacturing PMIs and their average, which correlates well with GDP.  As usual, the indices for each country were extreme-adjusted before they were combined into the BIG-8 indices.

The BIG-8 is made up of the USA, the Euro Area, the UK, China, India, Russia and Brazil.  Together, they make up roughly 70% of world GDP.

Note that the average of these extreme-adjusted PMIs is still above the "recession line" of 50%, implying that world economic activity is expanding, though, because they're not a lot above 50%, that it's expanding slowly.  Which seems to be born out by my estimates for world GDP, world IP and world retail sales.  Central banks have started cutting interest rates, inflation remains low, but politics could still pour sand into the machinery.  On balance, my guess is that growth will remain sluggish for the next few months, but will pick up thereafter.  

World PMI soggy

 Not a recession.  But certainly very far from runaway growth.   Services holding up, manufacturing sliding, with the average still above the 50% "recession line".

Big 8 = USA, Euro Zone, China, UK, Japan, Russia, Brazil, India, making up 70% of world GDP.  I extreme-adjusted each series before adding them up, weighted by PPP-GDP.

Big 5 PMI drops in September

The extreme-adjusted GDP-weighted PMIs for the Big 5 economies (US, Euro zone, UK, India and Japan, accounting for 53% of world GDP) slid again in September.  These are "flash", i.e. provisional, data, but in the past, although PMIs for individual countries do get revised, the revisions to the flash data Big 5 and Big 8 totals are minor.

The green line represents the "whole-economy" PMI, which is roughly correlated with Big 5 GDP growth.  As you can see, this level of whole economy PMI is consistent with sluggish growth, but not a recession--in other words, a "soft landing".  Central Banks have already started the falling interest rate cycle (bottom chart), and though the economy takes time to respond to falling interest rates, we can expect that growth will pick up in 2025, though I do not expect a rapid recovery.

The purple line shows the GDP-weighted average of CB discount rates,
covering 72% of world GDP.

Is the world economy really recovering?

 Or has it started a new recession?

I collect and maintain hundreds of time series from countries all round the world: North America, South America, Asia, Africa, Europe, Australasia.   I have a program which adds together all the series and produces a composite index of them all.   It's unweighted, but the number of component series is highest for the US, China and Europe.  Most countries are represented.  I monitor PMIs, industrial production, retail sales, unemployment rates, inflation rates, business and consumer confidence, money supply, car sales, and so on, for most of these countries, and for the big ones, many more.  For example, "jobs easy to find" in the USA, and "production of bullet trains" in China.  Where necessary, I seasonally adjust each time series.  My world composite index is made up of 430 series.

The result is shown below.  The year-on-year rate of change in my world composite index is compared to the rate of change in my weighted world index of industrial production.

The YoY % change in my world IP index is barely above zero, and for my composite index, it's off its lows, but is still below zero.  In other words, it's still falling, but is falling more slowly.

This is consistent with a sluggish recovery, but not a new recession.  This view is confirmed by my US leading indices, which point to the strong likelihood of a sustained recovery, though as I said in my previous post, my leading indices do not include fiscal stimuli.  Be that as it may, my US leading index leads the world economy by +-6 months, and it's only levelled off in the last couple of months.  This recent blip is not at all consistent with a deep recession.

So why have world stock markets fallen so sharply? The reason is probably because there was excessive optimism.  Investors and traders believed that there would be a strong recovery, and marked up share prices accordingly, misled perhaps by the rebound from "revenge spending" in services.  There was also a nice little bubble around AI, which has been hyped.  It reminds of the dot-com boom in the early 2000s.  The market is beginning to doubt that AI will make much money for the global IT behemoths.

I don't think there will be a renewed recession, what has been called a "double dip" recession.  But I do think there will be a very sluggish recovery for the next few months.  China is weakening; Europe is struggling, and the rate cuts by the ECB (European Central Bank) have been too little, too late; the US is slowing as fiscal stimulus drains out of the system, and the Fed should have started cutting rates a few months ago.  Emerging markets are in strife, because their currencies are falling because of  "the flight to quality", imposing new and unwelcome constraints on their economies.

My guess is that the fears engendered by the stock market plunge will bring forward and accelerate rate cuts, not because Central Banks care about investors per se, but because sharply falling share prices suggest that seasoned observers of the economy have seen what is happening more clearly than they have.  And of course, plunging share prices will affect business and consumer confidence.

Interesting times.  

Central Banks were too late raising interest rates after Covid, and are now too late cutting them.  Their staffs are paid quite a lot to get things so wrong.

World economy: both services & manufacturing picking up

We now have the services PMIs for the Big 8, so I've updated the chart.  As usual, each country's services and manufacturing PMIs were extreme-adjusted before they were combined (weighted by their proportion of world GDP) to give the Big 8 averages.  The green line shows the average of services and manufacturing, and will be the closest to actual GDP.   Note how, last year, services jumped as post-Covid "revenge spending" took off, while manufacturing didn't, but this year, both are picking up.  The Big 8 are:  the USA, the Euro Area/Zone (countries with the Euro currency), China, Japan, the UK, Russia, India and Brazil, which together make up roughly 70% of world GDP.

World growth continues to pick up, though I suspect its "slope", that is, the rate at which it will accelerate, will be moderate, as the effects of the US fiscal stimulus fade.

Double-click to see clearer image

The chart below shows the Big 8 manufacturing PMI, vs the year-on-year change in extreme-adjusted industrial production (my calculation).  Latest data for IP are estimates; we have IP to March and the PMIs to May.  It's comforting that the result of many different surveys produces roughly consistent results---it means that there are no special factors at play.  To put it another way:  the uptick in the world economy is real.  It's happening.

Double-click to see clearer image

The chart below shows the Big 8 PMI for manufacturing alone from 2000 to May 2024, as well the whole economy (manufacturing plus services) from 2012 to May 2024, compared with Big 8 GDP.  The only occasion in this whole period when the two PMIs moved in different directions was during the "revenge spending" episode in the first half of 2023.  World and Big 8 GDP (my calculations) are only available to Q4 2023, though we should have some idea of Q1 world/Big 8 GDP quite soon.  The PMIs give us some idea of what it will look like.

Double-click to see clearer image

World economy continues to recover

 S&P Global has released the provisional ("flash") estimates of the PMI indices for May.  The PMI indices are among the earliest data points available for the state of the economy.  The survey asks whether sales, employment, orders, etc are up or down on last month, but not by how much.  S&P Global then produces country indices for manufacturing and non-manufacturing/services.

I take these time series, extreme adjust them, and add them together, each weighted by that country's weight in world GDP (using purchasing power parity, or PPP, exchange rates to value national currency real GDP). 

The Big 5 are: the USA, the UK, the Euro Zone (European countries which use the euro currency), Japan and India.   The big 8 adds China, Brazil, and Russia to this calculation.

The chart below shows the Big 5 and the Big 8 GDP-weighted PMI averages, with manufacturing and service PMIs averaged (= "whole economy").  Since we don't have "flash" PMI estimates for China, Brazil and Russia, Big 8 PMI is only available to April.

Clearly, the world economy is accelerating.  Not only is the Big 5 PMI above the 50% "recession line" indicating that the economy is advancing, but it is also rising, i.e., the economy is accelerating.

The markets' conclusion that interest rates are likely to fall more slowly is correct.  And it is also likely that inflation will fall more slowly, too.

World GDP troughs too

As I mentioned yesterday, today I would show you what's been happening to world GDP.  These are my calculations, using national GDP data and weighting them by the percentage each country is in world GDP, using purchasing power parity (PPP).   It sounds a bit incestuous but believe me it works.  Both series in the chart show quarterly percentage change at annual rates.

Again, big regional/continental divergences in growth rates, with Europe negative in Q4, and the US strongly positive.  This divergence is because of fiscal policy, with the US expanding government spending with the "IRA" and Europe contracting spending because of budgetary crises.  Germany risks duplicating the UK's mistake of austerity after the GFC; and Germany is Europe's biggest economy.  Contracting government spending during a downturn doesn't balance the budget, it just drives the economy into deeper recession.

Because of structural weakness in China and foolish austerity in Europe, the economic recovery will be sluggish.

World industrial production troughing

 Preliminary estimates for November, December and January, my calculations.  Latest data partially estimated from PMIs.

The chart shows the 6-month rate of change, annualised.

World economic output is still falling, overall, but prolly troughing about now, but I don't expect a jet take-off, more a Sopwith Camel barely clearing the trees at the end of the runway.  

I'll calculate my estimate of world GDP tomorrow, but that will prolly confirm these calculations.  

Big 8 PMI average ticks up a little

 As usual, the services and manufacturing PMIs are PPP-GDP-weighted averages of extreme-adjusted country PMIs.  The average of the two (the green line) then gives us the "Big 8" total PMI.  The Big 8 economies are the USA, the Euro Zone, the UK, India, China, Russia, Brazil, and Japan.   They make up roughly 70% of the world economy.

As you can see, the "revenge spending" on services after covid lockdowns ended is fizzling, while the manufacturing sector may be bottoming.   Of these economies, the Euro Zone and the UK remain by far the weakest, while the US seems to be rebounding, despite the swingeing rise in the Fed Funds rate, because of the fiscal sugar hit caused by the so-called Inflation Reduction Act.  The varying response of Europe and the US to the combination of fiscal stimulus and monetary stringency demonstrates the effectiveness of big deficit spending:  big stimulus in the US stops the downturn, no stimulus in Europe lets the European economy slide deep into recession. 

I'm sorry I didn't comment on this earlier in the month.  I've been dealing with some personal issues.

Euro zone as weak as during the euro crisis in 2012

The economies of "small 8" (Switzerland, Sweden, SA, NZ, Israel, Canada, Belgium, Australia, making up ~6% of the world economy) are driven by what happens to the Big 8.   Whatever politicians in smaller economies promise, it's hard to evade the consequences of the global business cycle.

Why these countries?  They were the countries I could construct 20 years plus of data for.  I wanted to see the relationship over several business cycles.  I have recently found data for Denmark and Norway back to the late 1990s, so I will be adding them to the small 8, making it the small 10.  More of that in a later post.

World Industrial production continues to slide

According to my index of world industrial production, world IP continues to slow.  Most countries which release monthly IP estimates have produced data up to May.  I have estimated June IP for the majors using their June PMIs.  However, this technique may not prove reliable---we shall see.  (See the charts below for comparisons between the provisional and actual data)  

The chart below shows the calculation to May for Big 8 IP, compared with the same calculation to June.  Note that there have been revisions to previous months' IP data, as well as new observations for May.  April's IP data for several countries were revised up.

The Euro area's IP estimate for May using its PMI seems to be almost exactly in line with the actual IP data release for May.  We shall see whether the June estimate is as accurate.  At any rate, it seems clear that Europe is in recession.  

 

How the USA transmits its colds to the world

 The saying goes: if the US sneezes, the rest of the world catches a cold.  

There are good reasons for this:  the USA is the world's largest economy; it sets its monetary policy independently, whereas most other economies have to at least consider US policy; it has the world's largest capital markets; it owns the world's reserve currency.  So what happens in the US affects sentiment in other stock and bond markets and sentiment and policy in other economies.

But there is also a strong direct link.  As in most economies, the volume of imports is strongly correlated with domestic economic activity.  As its economy slows, the US reduces its imports.  And that leads to exports falling in other economies, which in time leads to their economies slowing too, even without them following the US in raising rates.

Both series extreme-adjusted.
See how import volumes slightly lag at the bottom of the cycle.

World industrial production is falling

 Some criticise me for following world industrial production.  "Most economies are mostly non-manufacturing these days", they say.  True, but the business cycle is normally driven by manufacturing and construction.  Covid was the exception, but the crash wasn't caused by monetary or fiscal policy, but by actual lockdowns.  "What matters is GDP, not sub-sectors of GDP", they say.  Also true, but GDP is quarterly and only published with a lag, whereas IP is available monthly.  And the business cycle components of IP and GDP are very similar, as the chart below shows.   The recent divergence between the two is because of the lagged demand for services because of lockdowns.  I don't know how much longer that'll continue.  As the manufacturing recession deepens, it seems probably that services will follow.  

World IP has started to fall, and it seems more than likely that GDP will also fall.

The chart below shows the 6-month rate of change in world IP, whereas the chart above shows the deviation from trend of world IP (and GDP).  It is now firmly negative.  However, the latest month is partially based on a new technique I'm using: estimating industrial production from manufacturing PMI surveys, though actual IP data for the US and China are used.  The estimates are for some of the other countries that make up world output data.  We'll see how effective that is over the next couple of months.

World industrial production slows again

The chart shows my calculation of world industrial production, extreme-adjusted and shown as a percentage of moving trend, compared with the diffusion index of all its components.   A diffusion index measures the percentage of a sample which is rising.  At 100% all components are rising, at 0% none is.  Traditionally, 50% is the "recession line": if the diffusion index is below 50, it's a sign of recession, and the further below it is the deeper the recession.

The fall in the orange line shows that world IP is growing more slowly than its recent trend, which is however quite strong.  In absolute terms, it's flat to marginally down.  The diffusion index has gone below 50%, which means more component countries have falling rather than rising IP---though I'm not sure whether to believe China's and Russia's data any more.

Here's a chart showing world IP since the end of the post-covid rebound, to get a better idea of the trend.  This time, it's showing the change over six months at an annual rate in the extreme-adjusted index.  So, so far, only a little bit negative.  

The last couple of months are provisional, because they are partially estimated from PMI indices, so they may be revised.  Estimates of world IP for January, February and March are likely to be revised only a little, while April and June will likely have larger revisions.