Surging world growth makes a mockery of Brexit panic
Global economic growth is accelerating sharply after months in the doldrums, confounding predictions of a worldwide recession following Britain’s Brexit vote.
The monthly ‘nowcast’ gauge of global activity assembled by Fulcrum Asset Management has picked up momentum dramatically over recent weeks, signalling robust world growth of 4pc growth over the second half of the year - even if there is a hiccup in the UK. This is up from 3.4pc in the last quarter and 2.4pc in late 2015.
Fulcrum said there are glimmers of hope that the world economy is at last reaching “escape velocity” after being trapped in deflationary malaise for much of the last seven years, coping with excess debt and slowly nursing banks back to health.
The US Federal Reserve’s retreat from four rate rises this year has had a catalytic effect, reviving the fortunes of emerging markets and once again lifting the Sword of Damocles hanging over the heads of those who have borrowed $11 trillion in dollars outside US jurisdiction.
The Fed is in effect acting as the central bank for the whole world, giving a shot in the arm to an international financial system that is has never been so tightly-linked to the dollar or to US borrowing costs – at least since the end of the Gold Standard.
The Japanese are launching a giant fiscal package – in theory 5.7pc of GDP – while France, Italy, and other eurozone states have taken advantage of the Brexit scare to end austerity more quickly than planned and to prime pump their economies.
The net effect is double-barrelled monetary and fiscal stimulus across the world probably overwhelms any of the inchoate and mostly political worries stemming from Brexit – at least in the short-term. It is hard to see what can now justify Morgan Stanley’s decision to raise its risk probability of global recession over the next year to 40pc after the referendum.
The biggest shifts in the Fulcrum model are in Latin America and above all China, on track for blistering growth of 7.8pc in the third quarter as the country’s reflation blitz finally gains full traction. The official Chinese data almost certainly overstates the actual level of growth but proxy indicators used by banks and private analysts also point to a powerful recovery.
Caixin’s PMI measure of manufacturing in China punched above the boom-bust line of 50 last month for the first time since early 2015. New orders are the highest in over two years.
The Caixin gauge has been creeping up in jerky moves for the last year but has suddenly gathered speed, not surprisingly since the Communist authorities have largely abandoned efforts to reform the economy and have instead returned to stimulus as usual, opening the monetary and credit spigots despite record debt ratios.
Local governments have been ordered to “front-load” fiscal stimulus. Combined credit and bond issuance is running at 17.2pc, and the M1 money supply has been growing at annual pace of over 40pc over the last six months.
Survey data released by the Chinese government on Monday showed that service growth is accelerating and construction is red hot. Capital Economics warned that the latest boom is built on rickety foundations and living off “borrowed time”, but there is enough spending in the pipeline to keep the expansion going into next year.
Tim Congdon from International Monetary Research says his tool for taking the global pulse – broad M3 money - points to a healthy world recovery for the next twelve to eighteen months. M3 growth has quickened to 5.3pc (annualised) in the US over the last three months, up from 4.5pc over the preceding year.
“We are seeing trend growth of money at around 4pc to 5pc in the industrial countries with low inflation. This is what Milton Friedman used to dream about,” he said.
“Quantitative easing worked in the US and now it is working in Europe too. I am very sanguine about the world,” he said.
Data from Henderson Global Investors paints a similar picture. Its proprietary gauge – six-month real M1 money – shows the fastest growth since the post-Lehman stimulus in the biggest G7 and E7 developed and emerging market economies.
The indicator measures cash and checking accounts, giving advancing warning of likely spending over the next few months. While monetary signals may have lost some of their potency in the modern the financial system, they often catch economic turning points.
The puzzle is why yields have fallen below zero on $10 trillion of sovereign bonds, pricing in economic depression as far as the eye can see. Switzerland, Japan, and Germany can all borrow for ten years at negative rates, Holland for nine years, France, Austria, Finland, Belgium, and Denmark for eight years.
Distortions are less extreme in the Anglosphere but 10-year US Treasuries are nevertheless trading at yields of 1.49pc, lower than at any time during the Great Depression or the era of ‘financial repression’ through the 1940s.
Events in the US are now crucial. Headline growth slumped to 1.2pc in the second quarter but this was distorted by inventory effects and does not tally with other figures. Consumer spending was up a blistering 4.2pc.
New home sales reached 592,000 in June, the highest since the Lehman crisis. Mortgage applications are soaring. The US labour market is tightening under almost all key measures and it is only a matter of time before this feeds into wage inflation.
Much can go wrong as the Fed tries to navigate the reefs through the eighth and ninth years of what is already an ageing global cycle. The irony of Brexit is that it has led to so much precautionary stimulus that it may cause the US to overheat sooner rather than later, and force the Fed to slam on the brakes.
But let the world first enjoy the sunlit uplands for a few happy months.