Global economy perks up as Goldman, JPMorgan predict rebound

Production operator, Kathy Grady is seen at work at the SolarWorld solar panel factory in Hillsboro, Oregon January 15, 2018. — Reuters pic
Production operator, Kathy Grady is seen at work at the SolarWorld solar panel factory in Hillsboro, Oregon January 15, 2018. — Reuters pic

NEW YORK, May 3 — The world economy showed signs of stabilising after a recent moderation as manufacturing activity strengthened for the first time this year.

A purchasing managers index for factories across more than 40 countries rose to 53.5 in April from March’s six-month low of 53.3, IHS Markit said in a report yesterday. Gauges of production and new orders both rose, though export growth slowed.

The numbers reinforce the advice from economists at Goldman Sachs and JPMorgan Chase not to bet against the world economy just yet. They could calm investors who spent the early part of 2018 fretting about a trade war and fading global growth despite forecasts from the International Monetary Fund for the fastest expansion this year since 2011.

“Forward-looking orders data point to solid output gains in coming months,” said David Hensley, director of global economic coordination at JPMorgan Chase in New York. He predicts global growth of 3.9 per cent this year, the same pace as forecast by the IMF.

Economists led by Jan Hatzius at Goldman Sachs are even more optimistic, saying this week that they are looking for a 4.1 per cent expansion in 2018.

There are still areas of concern. Growth in the euro area slowed to the weakest in six quarters in the first three months of the year. In manufacturing, while the U.S. PMI hit the highest since 2014, the euro zone slipped to the lowest in more than a year.

Among the reasons to stay optimistic are that activity may have been restrained in the early part of 2018 by one-off factors such as poor weather, an outbreak of flu in Germany, strikes in France and the timings of Easter and holidays in China.

Carl Riccadonna of Bloomberg Economics said: “There were myriad reasons for disappointing economic performance in the first quarter, ranging from heightened economic certainty regarding a potential escalating trade war (that has yet to materialise), the ‘Beast from the East’ dampening activity in the UK and a reprise of residual seasonality — a statistical quirk — weighing on US output.

“These are all transitory factors which should lead to a global rebound in activity in the current quarter and into the second half. The US economy, in particular, will lead the way.”

President Donald Trump’s tax cuts have also yet to fully take effect while tight labor markets should increasingly generate wage growth, underpinning consumer confidence and spending. Central banks are signaling they will lean toward supporting demand by taking care to remove the record low interest rates of the past decade.

The Federal Reserve left its benchmark rate unchanged late yesterday, acknowledging inflation is close to target without indicating any intention to veer from a gradual tightening path.

At Deutsche Bank AG, currency strategist Alan Ruskin said the manufacturing figures should “play against fears of a more precipitous global slowdown,” although he noted the readings in many economies were below where they were three months ago.

One positive effect from a modest cooling is it could “mitigate some risks of overheating,” according to Ruskin. Some manufacturers have warned that they are running into capacity constraints, forcing them to raise prices.

“There is still scant evidence that we’re at a turning point in synchronised growth,” said Christian Keller, global head of economics research at Barclays Plc. “We think there has been a soft patch.” — Bloomberg