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Global economic growth 'now in free fall'


Fresh readings on the state of global manufacturing have heightened fears of an economic slowdown at a time when some prominent strategists are warning investors of increasingly difficult market conditions in the coming months.

Merrill Lynch strategist Ajay Singh Kapur recently wrote that "global [economic] growth is now in a broad, deep and persistent slowdown," creating market conditions that, I believe, will make life treacherous for commodity sectors and beyond.

The JPMorgan Global Manufacturing PMI's reading for December, released on Wednesday morning, appeared to support that view. It came in at 51.5 for December, down from November's 52 and a good distance lower than 54.5 at the end of 2017. The global index combines national surveys of major manufacturing company executives who answer a series of questions regarding hiring, new orders and the pace of overall business activity. Purchasing managers' indexes (PMIs) are structured so that an index level of 50 represents no change from the previous month, above 50 indicates improving business conditions and readings below 50 indicate contracting activity.

In separate national surveys released on Wednesday, the Caixin/IHS Markit PMI for China slipped into contraction territory for the first time in 19 months, while euro zone manufacturing activity barely expanded. A reading on U.S. manufacturing from IHS Markit fell nearly two points to 53.8, marking a 15-month low.

The accompanying chart illustrates the importance of the recent downtrend, showing the close association between the JPMorgan global manufacturing index and the metals prices that determine profit growth for Canadian and global mining stocks. The blue line represents the year-over-year change in the JPMorgan Global Manufacturing PMI and the purple line depicts the year-over-year change in the S&P GSCI Industrial Metals Index.

The chart shows that the acceleration in manufacturing activity peaked in February, 2017, and the rally in metals prices peaked six months later. Since August, 2017, growth in manufacturing activity has been decelerating rapidly, dragging metal prices with them.

Mr. Kapur, in a report released on Wednesday, provided further evidence of declining economic activity. A Duke University survey of global chief financial officers shows that CFO confidence in the world economy has collapsed to levels below that of early 2016.

Mr. Kapur estimates this decline in confidence will result in U.S. PMI levels falling to 50.3 by the end of February, significantly below the November U.S. PMI reading of 59.3. He predicts European PMI survey readings to fall deeply into contractionary territory at 45.9 from 51.8 in November.

The strategist says economically sensitive market prices reflect investors' aggregate projections for global growth. He highlights the decline in prices for assets such as copper, palladium, furniture and shipping stocks and concludes that global growth "is now in free-fall, signalling much weaker growth ahead."

Morgan Stanley chief U.S. economist Ellen Zentner, a prominent voice on Wall Street, is also concerned with the latest economic signals.

"The U.S. economy is running out of stimulus steam, central banks are less accommodative, and global growth is slowing," she said in a report on Wednesday.

Ms. Zentner forecasts 1.7-per-cent year-overyear U.S. growth domestic product growth for the fourth quarter of 2019, much lower than the consensus estimate of 2.3 per cent and, while not recessionary, this would be the slowest expansion since 2012.

The forecasts by Mr. Kapur and Ms. Zentner are more dire than we're used to from major sell-side research firms. Market activity on Wednesday, however, offered hope that things may not be as bad as they seem.

Stocks opened the session significantly lower after the release the weak PMI data from China and also signs of slowing activity in Europe.

But North American markets recovered to end Wednesday trading in slightly positive territory.

Investors can hope this intraday rally signals a bottoming in economic fatalism, and more optimism for global growth building for 2019.

© The Globe and Mail

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