The Chinese Year of the Fire Rooster lived up to its fiery characteristics, with 2017 concluding as a year of renewal and enthusiasm for the global economy. 'Synchronised global growth' was one of the most talked about topics in the investment community in 2017, and for good reason, as growth in both advanced and emerging economies accelerated for the first time since 2010. For 2018, the Year of the Dog, a key question is whether this synchronised growth backdrop will be sustained.
We identified three takeaways from the latest set of Purchasing Managers’ Indices (PMI), which provided an update on global business activity in January. First, the theme of global synchronised growth remains intact. The global composite PMI (a combined activity index of manufacturing and services activity) rose to the highest level in over three years in January, with measures of both advanced and emerging economies edging higher. Regionally, the US Institute for Supply Management (ISM) composite and the Eurozone PMI both rose to their highest levels in 12 years. The big-four Eurozone economies’ (Germany, France, Italy and Spain) PMIs remained elevated, while heavy-weight Asian economies like Japan and China also saw faster growth rates as 2018 kicked off.
Second, the PMIs highlighted further growth divergence between the UK and other major developed economies. For the Eurozone, the current level of composite PMI points to about 1% quarterly growth in the first quarter, after the fastest annual growth in a decade in 2017. For the US, the ISM composite rose to a 12-year high level, driven by the robust services sector. On the contrary, the UK composite PMI fell to its lowest since August 2016, as all three UK PMI sectors (manufacturing, services and construction) dipped in January. The broad-based deceleration in UK activity at the start of 2018 reinforces our view that UK growth will continue to underperform relative to other developed economies.
Last but not least, amid strong global demand, tightening labour market and rising capacity constraints, PMI input cost pressure heightened to a six and a half year high and in a broad-based manner globally. With more inflation in the pipeline, the surge in the oil prices and evidence of faster wage growth (for instance, US wage growth rose at the fastest pace since June 2009), major central banks may need to accelerate policy normalisation or start to change their extremely accommodative policy guidance. We think the Federal Reserve may raise interest rates four times in 2018 instead of the three that was pencilled in previously. The Bank of England may hike again as early as May this year due to the build-up in excess demand and persistently above-target inflation. The European Central Bank may start to convey a more hawkish tone in March given economic strength and eventually wind down its asset purchases in September.
As seen in Investment Week 19th February 2018.