Slump or slowdown? Services hold the balance

February 1, 2019

By David Milliken

LONDON (Reuters) – A month into 2019, market fears that the world is heading for recession have abated — but the fragile, more positive outlook hinges on the large services sectors of major economies resisting the jitters that have roiled manufacturers.

Global share prices are up nearly 8 percent since the start of the year, their biggest January gain on record, even as the month’s manufacturing surveys showed the weakest activity in years, due to slower demand and trade tensions between the United States and China.

The theory that greater resilience in the larger services sectors in the world’s two biggest economies will keep growth from slowing too sharply will be put to the test over the coming days, as purchasing managers’ surveys trickle out.

“Everyone over-focuses on the manufacturing numbers,” HSBC economist James Pomeroy said. “Some of the industrial cycle data is clearly rolling over a bit, but global growth is unlikely to capitulate.”

Chinese data no longer looked like it was in free-fall, and investors had underestimated the effectiveness of stimulus that was working its way through the economy, he added.

“The market is definitely coming round to a more benign view about China than the hard-landing, crisis-type stuff that was being talked about in December,” he said.

U.S. President Donald Trump’s statement late Thursday that he was willing to meet Chinese President Xi Jinping to try to seal a comprehensive trade deal reduced the risk of trade tensions escalating in the short term, said Geoffrey Yu, an investment strategist at UBS Wealth Management.

Domestic consumer demand in China was holding up, but that alone would not stop a slowdown.

“The bottom line is resilience is not good enough to keep growth where we are used to,” Yu said.

The International Monetary Fund forecast last month that global growth this year would slow to 3.5 percent from 3.7 percent, with advanced economies seeing a fall to 2.0 percent, the weakest since 2016 but well short of recession.

Unemployment is low and nominal wage growth is at or near its fastest since the global financial crisis in the United States, Germany and Britain, supporting consumer demand.

U.S. jobs data on Friday showed the fastest hiring in nearly a year and no discernible impact from a government shutdown.

However, factory output is often seen as the canary in the coalmine for growth, due to its exposure to international demand, greater volatility and role in driving investment.

Somewhat over half of recessions in the manufacturing sector lead to the economy as a whole taking a tumble, estimates Adam Slater of British consultancy firm Oxford Economics.

German industrial orders and output numbers will be under close scrutiny, after a series of declines wrongfooted forecasters and raised fears about the world economy.

“If we see the weakness from manufacturing start to bleed across into services, then that will be worrying,” Slater said.


Much of the recovery in share prices this year reflected the belief — vindicated on Jan. 30 — that the U.S. Federal Reserve would scale back its plans to raise interest rates in 2019 due to market turmoil and an uncertain economic outlook.

“They have clearly prepared the ground to reverse course if they need to. But it’s a bit early,” Slater said.

The Bank of England, whose Governor Mark Carney gives a quarterly economic update on Thursday, is likely to continue to say it plans to raise interest rates gradually to head off inflation threats from a tight British labor market.

But with the world’s fifth-largest economy still at risk of a disruptive departure from the European Union on March 29, due to an impasse over potential EU requirements for border checks with Ireland, immediate BoE action is off the table.

Nonetheless a minority of analysts, including HSBC, think one of the BoE’s nine Monetary Policy Committee members will put out a marker by calling for a rate rise now.

The Reserve Bank of India, which also announces its next policy decision on Thursday, is seen keeping rates on hold too, shifting its policy stance to neutral and preparing for a rate cut by mid-year, according to a Reuters poll — a sharp change from just a few months ago.

While political pressures may play a role in India’s case, so too does the global environment of subdued growth and limited underlying inflation pressures.

“The global rhetoric of lower policy rates is not just a developed market one, it is an emerging market one,” Pomeroy said.

(Reporting by David Milliken; Editing by Toby Chopra)