Weekly Economic Briefing

Standard Life’s Global Outlook Report.

With all the negative headlines coming out of the Ukraine and Middle East in recent weeks, it has been easy to forget that the global economy is actually in fairly good shape.

Helped by generally loose financial conditions, as well as pent-up demand in most developed economies after years of tepid growth, the global composite Purchasing Managers Index (PMI) held up at 55.1 in August.

That reading is a little lower than the levels recorded in June and July, but it is still the third highest outturn since the beginning of 2011. Helpfully, the global recovery is becoming less dependent on manufacturing activity to drive growth.

Whereas the global manufacturing PMI is currently at 52.6, signalling healthy though not spectacular growth, the global services PMI is sitting at 55.5, not far from a post-financial-crisis high. Taken at face value, such levels of business sentiment are consistent with above trend global output growth, although there has been a tendency for the PMIs to overstate official GDP growth in recent quarters.

While the global backdrop is undoubtedly positive, not all countries and regions are sharing in the wealth equally (see chart 1).

Among the world’s largest economies, the US and UK continue to lead the way, reinforcing our view that the Federal Reserve and Bank of England will be the first central banks to begin raising short-term interest rates.

The US in particular appears to be accelerating into the second half of the year, led by vehicle sales and business investment. Sentiment is also holding up fairly well in Japan, although it is well below the levels recorded at the beginning of the Abe revolution and the rebound from the sales tax hike has been weaker than hoped.

However, the biggest disappointment is the Euro-zone, where the recovery is in danger of petering out before it even began. The biggest drags are still France and Italy, although even German growth has moderated of late; no prizes then for guessing why the ECB announced new easing measures last week.

The BRICs remain a mixed bag. The Chinese authorities are pushing to hit their 7.5% growth target, despite the related financial risks being generated.

Meanwhile, Russia is sinking under the weight of sanctions and Brazil has fallen into recession. Indeed, only the Indian economy seems likely to accelerate in the second half of the year.

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