March 8, 2017    3 minute read

Global Economic Growth: The Bigger Picture

Up or Down?    March 8, 2017    3 minute read

Global Economic Growth: The Bigger Picture

Based on a slew of economic metrics that came out on Friday, March 3rd, the uptick in global economic growth carried on in February 2017. However, this view fails to reflect the complete picture – there are still some signs that the momentum in global growth is slowing down slightly.

Manufacturing Sector Makes a Rebound

Data released last Friday suggests that global manufacturers had its busiest month in almost six years. The JP Morgan-HIS Markit Global PMI rose by a further 0.2 points, to 52.9, last month – the highest level in over six years.

The Purchasing Managers Index (PMI) is a measure of the change in activity levels across the global manufacturing sector. The metric ranges from 0 to 100, while a reading of 50 is considered to be neutral.

Naturally, anything above this neutral level is considered as a positive indication regarding an improvement in the manufacturing activity levels whereas a reading below 50 suggests that activity levels have fallen.

Furthermore, the distance from the neutral reading of 50 suggests how rapidly activity levels have improved or worsened with respect to the previous month’s levels. Therefore, it is safe to say that in February not only did manufacturing activity levels improve, but they did so at a quicker pace.

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Although manufacturing makes up less than 20% of the economy in several key economies such as the United States and the United Kingdom, it is still a significant component and can often support to services industries.

The Services Sector: A Mixed Bag

Based on a survey conducted by Markit, growth in the United States services sector slowed down marginally last month versus January but still signalled fairly buoyant growth. However, things were not as upbeat in the United Kingdom.

Data from the Markit/CIPS UK Services PMI was worrying as it showed that momentum slowed more than analysts had expected, therefore leading economists to issue warnings claiming that the Brexit vote to leave the EU is beginning to have an adverse impact on the UK economy.

Impact on Equity Markets

A recovery in the global economy has been a key factor in pushing the stock markets higher. An increase in global activity makes it easier for firms to increase sales numbers and, consequently, increase profits.

While many investors mention President Trump’s prospective policies of lower taxes and less financial regulation as factors that will lead to an upward swing in stocks, however, many fail to acknowledge that a recovering global economy has been an equally important factor, if not more consequential, for stock markets.

Looking Ahead

Although global growth appears to be picking up speed, it still remains near historically low levels. Therefore, the data for the coming months will be consequential in determining how investors are likely to feel about economic conditions.

For instance, if the momentum gathered thus far were to fizzle out gradually over the next few months, the market will likely return to a state of worrying over low global economic growth.

Nevertheless, it seems that the UK is presently at a precipice: on one side lies the dark and doomed pit of low economic growth and on the other, a future with sustainable higher growth. The side the country ends up on remains to be seen.

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