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.

Click here to download the full report.

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Outlook for 2014: sustainable growth.

Standard Life Investments, the global investment manager, has announced that its House View is more confident about the economic backdrop into 2014 and advocates a move towards sustainable earning growth within client portfolios.

In the latest edition of Global Outlook, the House View highlights that during the last quarter financial markets have been affected by four major issues; an improvement in forward looking business cycle indicators in the developed markets, the pricing in of the Fed’s potential exit from its quantitative easing program, efforts by the Chinese authorities to stabilise the economy, and a revival of political and geopolitical risks. The net result has been a decisive shift towards developed market assets, which has supported Standard Life Investments’ House View performance.

Andrew Milligan, Head of Global Strategy, Standard Life Investments said:

“Our portfolios are slowly becoming more cyclical. There are still yield opportunities which should be sought in a world of low interest rates – after all both the ECB and MPC have announced forward guidance. Nevertheless, the economic cycle is expected to become more positive into 2014; the key issue is the ability of companies to drive forward profits growth.

“In broad terms, the House View is Heavy in equity and in real estate, Neutral in Credit and Cash, and Light in Government Bonds. Within fixed income assets, it prefers higher yielding credit to investment grade or government bonds. Within equity markets, it favours the US, and to a lesser extent Japan and the UK to Europe and emerging markets.

“Japan continues to be examined carefully in the House View, as its performance could have a material impact on portfolios. The market has priced in the new monetary and fiscal policies of the Abe government, and eagerly awaits good or bad news on the structural reforms and associated tax announcements which the government is considering.”

Click here to read the full report.

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