Global: Business Cycle Monitor

Summary and outlook

Sentiment and leading indicators currently show a murky picture of the global economy. In the US, signals are mixed as ISM is still strong but demand data has weakened somewhat. Euro short-term indicators are still weak but rising real money growth still underpins the case for recovery next year. In Japan, indicators are a bit mixed but overall point to stronger growth following the weakness after the VAT hike. Chinese production is soft and still signals some downside risk to PMI.
Short term, we expect the soft picture to continue with a rising risk of a significant decline in US ISM while euro surveys stay weak. There is also still a risk of a further decline in Chinese PMI. However, looking into 2015, we look for a bottom in the global cycle during Q1 with a moderate recovery in the following quarters.

Details

The signals for the US are somewhat conflicting. On the one hand, the ISM has stayed at very strong levels. On the other, a range of indicators points to slowing growth: the OECD leading indicator for the US fell for the second month in September, the order-inventory balance in Markit PMI has weakened and actual demand growth has slowed. We thus see a risk that it is the ISM that will correct lower to the other data over the coming months.
The direction of the euro leading indicators has not changed and is still soft. Both the Ifo and Zew expectations are decreasing and there are not many positive signs from the hard industrial data either. However, there is a little light giving support to the case for recovery next year: a) real money growth has increased recently and b) we see a marginal improvement in the momentum of the leading indicator.
Looking to China, the picture remains mixed. PMI has been holding up fairly well but actual manufacturing production has been weak in recent months, leaving a risk that PMI will fall further to reflect the true weakness. In Japan, the downward momentum in the leading indicator has eased a lot and industrial production (IP) as well as PMI have improved in the past months. The Eco Watchers survey has weakened again recently.
In the Scandi countries, Denmark has been the weak link with a sharp decline in manufacturing confidence. In Norway and Sweden, signals are mixed.

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