Two graphs can illustrate the uncertainty surrounding the world economy.
The first is related to the geographical sources of growth. The second is more specific to the Euro Area. It shows the fears that Mario Draghi can have on immediate prospects. He explained this point in his speech in Jackson Hole and again during his press conference last Thursday after the ECB meeting on monetary policy.
The first graph represents PMI/Markit and ISM indices taken from surveys on the manufacturing sector. It shows large countries or regions and specific aggregates.
In August, the United States are the only country that can be perceived as an engine to the world economic growth. Other indices are close to 50, the threshold between improvement and deterioration.
This situation was already seen in July but is stronger in August.
The most important drop was seen in the UK. From August 2013 to June 2014 its index was above 56, it is just 52.5 in August. Emerging and BRIC indices have also a weaker momentum in August. China is the main explanation for both as its index converged to 50.2 after 51.7 in July.
Euro Area is at the bottom of this ranking with only 50.7. It shows that the peak of the business cycle, in that region, was probably touched during the first quarter of 2014.
Japan is the only country to see improvement. Its index is at 52.2 after a persistent decreasing following the VAT rate hike on April the 1st. Nevertheless with the large decrease in consumption I’m not sure that the rebound will last (see here)
The USA have a really strong dynamics currently (listen to my comment here) but all the other regions, even if each index is above 50, do not grow rapidly. From surveys’ details, a strong growth acceleration cannot be expected rapidly from them.
The problem here is that there is no real candidate, except the United States, to improve the global business cycle via the manufacturing sector. And none is able to boost the world trade dynamics (see here the analysis with the latest available data)
And even the United States with a GDP growth close to 2.5-3% is not powerful enough to change the picture. This growth momentum is good for the US but it is not enough to be an engine for the world economy. Other countries should take the relay but potential candidates are limited when we look at the graph.
A medium-term point of view is more optimistic as oil price is lower due to a lack of demand and higher production and because financial conditions are still very accommodative. But that’s why the Bank of England and the Fed has to think twice before increasing their interest rates. They don’t have to be in a hurry on this issue.
The rate increase will not come from the ECB. The second chart shows the internal demand profile and those of its components. In Jackson Hole and during his last press conference (September, 4), Mario Draghi said that the weakness of this internal demand was his major source of concern. (he already said that in the past, it is not a recent change in his thinking)
Internal demand is the major support for GDP growth. It’s, alas, the main source of weakness for the Euro Area (it’s still 4% below it first half of 2008 level). As far as it is not more robust, a strong and durable growth episode cannot be expected.
We see on the chart that since 2010, government expenditures have a neutral role (green line). They were a strong support in 2009 but the 2010 recovery and then austerity policies have changed their momentum. Households’ consumption is still a source of weakness for growth. It is still -1.4% below it S1 2008 level but represents 56% of the real GDP (average in 2012-2013). Investment has dropped dramatically (residential and non-residential). Its drop is such that it will a source of a supplementary deceleration in potential growth.
Draghi asks for a stronger support for this demand in order to converge to a stronger trajectory. Demand policy is just that. With weak households’ consumption and no momentum in investment it is just impossible to imagine being able to grow. The supply policy he mentioned is just a way to improve growth conditions in the Euro Area.
Due to rigidities, the task will be hard to manage even with interest rates at 0.05%.
