Wednesday, August 7, 2013

Major economies out of sync

Investment advisors pitching actively managed accounts, funds, and other products will often draw a sine wave to represent the global economic cycle and discuss what actions they would take at different points on the cycle. The problem of course is that it's nearly impossible to tell where a nation's economy is on the "sine wave" until years later - making it hard to take some of these proposals seriously. Yet it's an exercise worth doing - if anything, just for discussion purposes. Here is how some of the largest economies could potentially be mapped onto the economic cycle curve.

1. BRIC and other key emerging market nations fall into the category of slowing economies. Of course there is plenty of dispersion among them. Russia, India, and Brazil are struggling with growth, while some argue that China's growth has bottomed out (highly debatable, given the real estate and credit issues). Saudi Arabia on the other hand is doing quite well. The overall composite however is showing a slowdown, with the EMG PMI index at the lowest level since the Great Recession.

Source: Markit

2. We've discussed Australia (see post), where the economy is definitely slowing.

3. The Eurozone is clearly beginning to recover (see post).  PMI measures across the board are showing improvements, including France, Spain, and Italy. Even Greece is beginning to stabilize.

Greek manufacturing PMI (source: Markit)

Of course we are still in the early stages of recovery and the Eurozone has a long way to go. Here is what the composite looks like for euro area as a whole.

Source: Markit

4. The UK recovery is accelerating. The latest measures show a strong rebound across multiple sectors, particularly in service industries.

UK service PMI (source: Markit)

5. It's difficult to say where the US is on the cycle. The recovery has been going on for some time - certainly longer than in the UK or the Eurozone - but it has been quite tepid. Is it about to accelerate or continue at its current pace? There is a great deal of debate about that.

6. Japan is a wild card. We've seen a sudden jump in industrial activity and exports, but more recently things have not looked that great (see post). Given Japan's short economic cycles, it's not clear if we are still in the early stage of the recovery or if growth has peaked. Much of course will depend on government policy such as the implementation of the new sales tax proposal (see story).

Based on these generalizations, here is a very rough picture of where the various economies are on the cycle. Note that this doesn't say anything about how deep the slowdown has or will be or how fast the recoveries are. This is just about where we are on the the "sine curve" (each nation's cycles could be quite different in amplitude and frequency).

One can have long debates about the relative placement of these boxes. It is a fact however that major world economies are all over the place in terms of their economic cycle. It seems that we are witnessing the long-awaited global decoupling, although it may not be exactly what some had in mind (see WSJ story).
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