Standard Life Investments weekly economic briefing

There was a whiff of panic in markets at times last week.

Equities and oil prices took a hit, long-term government bond yields fell across the developed world, emerging market and high yield credit spreads widened, while the dollar climbed further.

The initial catalyst for this bout of risk aversion was a round of disappointing manufacturing PMIs in September, which brought into question expectations that the global economy is on an improving trend. Negative sentiment was then reinforced by the ECB’s failure to reveal the likely size of its asset-backed securities purchase programme, together with the perception that Draghi was hedging his commitment to return the central bank’s balance sheet to its early 2012 size.

It wasn’t until the US employment and non-manufacturing ISM reports surprised to the upside that risk appetite recovered.

So, how worried should investors be about the outlook for growth? Well, it is true that global manufacturing sentiment has lost some momentum in recent months. Besides the usual suspects in the Eurozone, sentiment fell back in most of developing Asia, as well as the US and UK which had been leading the pack.

This dovetails with the hard global industrial production and goods trade data which are displaying only modest growth. Meanwhile, consensus forecasts for 2014 have been downgraded for most G20 countries and expectations for 2015 are now starting to be downgraded as well (see chart 1 in the attached).

Yet there is no need for panic. Manufacturing PMIs receive a lot of attention from market participants, but the services sector makes up a much larger proportion of global economic activity.

In this sector, sentiment is holding up much better. Regular readers will know that we have never been bulls on the Eurozone’s growth prospects but even here investors have to be patient as it will take time for the weaker currency and recent monetary policy initiatives to feed through to the real economy.

If there is a moral to this story it is that strong US growth is still necessary but no longer sufficient to generate strong global growth.

From the US side, growth is not as import-intensive as it was in the past. And even if it were, much of the rest of the world is suffering under the weight of a variety imbalances and structural headwinds that cannot be solved by stronger US demand.

Click here to read to full Standard Life Investments Weekly Economic Briefing.

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