| Source: UBS Global Asset Management, JP Morgan | Source: UBS Investment Bank |
A range of economic indicators in recent months point to a slowdown in the global economy.
Our global industrial production series fell 0.6% in April, the first monthly decline since a 0.1% fall in June 2010.
The weakening in growth is broadly based. As can be seen in our first Chart of the Month – Industrial Production – there has been a softening in the pace of growth across a range of countries and regions.
For the Industrial countries, the decline in output was focused in March when Japanese production declined by 15.5% in the wake of the earthquake and tsunami. Other countries have also felt this impact, particularly within their automotive sectors, as supply chains have been disrupted. US automotive production is down 7.8% from its March peak.
But there looks to be a little more than just this going on. US manufacturing inventories have risen relative to sales since early in the year and are now at their highest level since mid 2009. The fall in the new orders series from the ISM survey of the US manufacturing sector is consistent with a weakening in growth in coming months.
China is also slowing. The pace of growth in industrial production has eased back from an annualised 19% earlier in the year to be closer to 12%, with a further deceleration in progress.
Industrial output has flattened out recently in Asia (ex Japan and China) and in Eastern Europe. In the Euro zone there has been little growth in industrial production in recent months following a 9% rise through 2010.
This weaker trend in growth has been impacting financial markets over the past couple of months. A good way to analyse this is by looking at an economic surprise index. This series measures the differential of actual economic data outcomes relative to expectations.
In our second Chart of the Month, positive economic surprises (stronger growth, lower inflation) drives equity markets higher (as demonstrated by the S&P 500 Index) and vice a versa for negative data. It cumulates these surprises through time and over the past 4 years it has tracked closely to the turning points and cyclical swings in the equity market. The recent trend of weaker data, which has disappointed markets, has seen equities pull back from their peak, as expected.
Where to now? We continue to expect the global economy to be on a recovery trend and see the current episode as a soft patch rather than something more serious. To get a sense of whether a turning point in markets is approaching it pays to keep an eye on how data is evolving relative to expectations.
There's the old saying that its darkest just before the dawn. For financial markets poor data, but an outcome not as bad as expected, can be the first signs of an economic sunrise.
The weakening in growth is broadly based. As can be seen in our first Chart of the Month – Industrial Production – there has been a softening in the pace of growth across a range of countries and regions.
For the Industrial countries, the decline in output was focused in March when Japanese production declined by 15.5% in the wake of the earthquake and tsunami. Other countries have also felt this impact, particularly within their automotive sectors, as supply chains have been disrupted. US automotive production is down 7.8% from its March peak.
But there looks to be a little more than just this going on. US manufacturing inventories have risen relative to sales since early in the year and are now at their highest level since mid 2009. The fall in the new orders series from the ISM survey of the US manufacturing sector is consistent with a weakening in growth in coming months.
China is also slowing. The pace of growth in industrial production has eased back from an annualised 19% earlier in the year to be closer to 12%, with a further deceleration in progress.
Industrial output has flattened out recently in Asia (ex Japan and China) and in Eastern Europe. In the Euro zone there has been little growth in industrial production in recent months following a 9% rise through 2010.
This weaker trend in growth has been impacting financial markets over the past couple of months. A good way to analyse this is by looking at an economic surprise index. This series measures the differential of actual economic data outcomes relative to expectations.
In our second Chart of the Month, positive economic surprises (stronger growth, lower inflation) drives equity markets higher (as demonstrated by the S&P 500 Index) and vice a versa for negative data. It cumulates these surprises through time and over the past 4 years it has tracked closely to the turning points and cyclical swings in the equity market. The recent trend of weaker data, which has disappointed markets, has seen equities pull back from their peak, as expected.
Where to now? We continue to expect the global economy to be on a recovery trend and see the current episode as a soft patch rather than something more serious. To get a sense of whether a turning point in markets is approaching it pays to keep an eye on how data is evolving relative to expectations.
There's the old saying that its darkest just before the dawn. For financial markets poor data, but an outcome not as bad as expected, can be the first signs of an economic sunrise.
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