- Data out of US and China points to global re-acceleration in Q2
- Euro area data points to upside risks to growth
- We remain cautious on stocks but constructive on credit
- Rising upward pressure on bond yields as growth and inflation rise
Over the past quarter, two of the main engines of global growth – the US and China – witnessed a clear slowdown. Chinese growth hit a five-year low in Q1 falling to 7.4% y/y and US GDP in the same quarter is expected to hit 1% (released next week) following an average of 3% growth in H2 13. However, recent data has provided further evidence that global growth is re-accelerating going into Q2. In the US, retail sales and manufacturing production rose stronger-than-expected in March and the weekly jobless claims have fallen to a seven-year low, pointing to a further rebound in April. The Philadelphia Fed survey also recovered decently in April (see US Easter update – stronger data going into Q2, 23 April 2014). Housing activity data is still on the soft side but house price inflation has picked up again recently to a run rate of around 6% annualised. Hence, wealth continues to rise more strongly than incomes, which normally supports a gradual decline in the savings ratio.
Turning to China, the HSBC manufacturing PMI for April also suggested that the worse may be behind us for now. Since 2012, China has moved in mini-cycles around a 7.5% growth rate which has been fine-tuned by Chinese economic policy. As in 2013, China has recently launched moderate stimulus to secure a continued path around the 7.5% growth target. It seems likely now that we will see further increases in Chinese PMI in coming months on the back of the recently announced stimulus.
The order-inventory balance in the PMI statistics also improved in April suggesting that the inventory cycle is turning more favourable in the short term. The bottoming of Chinese activity should underpin Emerging Market assets in coming quarters. However, bear in mind that the markets have already discounted some of this. Generally, the markets have been quite good at anticipating when the PMI is near the bottom and stimulus is launched.
In Europe, data also provided encouraging signs that the recovery continues to unfold with little signs that the recent slowdown in the US and China is having much impact. Euro area Flash PMI for April surprised on the upside with composite PMI rising to the highest level since May 2011. German ifo business confidence also increased in April, pointing to a further pick-up in German growth and sentiment has generally recovered strongly in the peripheral countries as well (see Periphery business cycle monitor, 24 April 2014).
In addition, euro area consumer confidence rose further in April hitting a seven-year high, in a further sign that optimism is returning to euro area households. In the UK, the labour market continues to surprise on the upside. Unemployment fell more than expected to 6.9% in February from 7.2% in January and the 3M/3M rise in employment rose to 239.000 from 105.000 in the previous month. House prices also continue to rise vigorously and retail sales are growing at the highest rate in 10 years.
Looking ahead, we expect US growth to accelerate to 3% in Q2 as more of the weather effects unwind. Going into H2, we expect this growth pace to continue, supported by robust wealth gains, decent real wage growth, improving employment and generally low uncertainty. When it comes to China, activity is also expected to see a lift over coming quarters.
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