According to the team’s Global Cycle Notes research document, sent out to clients at the end of last week euphoric credit markets, a stabilising mining sector and a recovery in tradable goods are three key factors that have raised hopes of a world economy reaching exit velocity in the first half of this year. However, while these factors hint at a recovery, deep political change in Europe and the US could undermine the recovery. There is also the wildcard of China to consider. It is the view of Credit Suisse’s Global Strategy team that China will slow in the months ahead.
The outlook for the economic growth is as unclear and uncertain as it has ever been, although Credit Suisse has narrowed down the number of themes investors should be watching going forward to six:
“Slowing growth is our judgment, but high complexity is our theme. Below we examine six assumptions we have made. Some are good for growth, others bad.
- The global mining slump is ending.
- Brexit is a new shock to European growth.
- Chinese growth will slow in the second half.
- US growth patterns will continue (solid households, sluggish factories).
- Global financial conditions, currently very easy, will keep oscillating with periods of panic and illiquidity interrupting the search for yield.
- Political shocks are likely. (Article 50, Italian referendum, US election, European elections, terrorism.)”
Catalysts such as Brexit, China, US growth, financial market instability and political shocks have been widely analysed over the past few months by many on Wall Street and in the financial media, but it’s Credit Suisse’s analysis of the global mining slump – or end thereof – that’s fascinating.
Does the mining sector hold the key to global growth?
The collapse in mining and energy investing has been a key contributor to the global growth slump since late 2014. Global industrial production has grown just 0.5% p.a. since then, far below the 3.1% long-term trend.
Credit Suisse’s research shows that the investment weakness for many countries over this period has been concentrated in mining, energy, and related sectors like railroads. The magnitude of the structural weakness that has resulted from the slowdown in spending is significant.
For example, US mining structures investment, which is closely related to the oil and natural gas rig counts, has fallen nearly 65% since its peak, deducting $110 billion from GDP.
There are some signs that this slowdown could now be coming to an end. Commodity prices have rebounded somewhat in the past six months alongside improving global growth momentum. Metals prices have been steady, and dollar appreciation has been modest so the shock that hit the resource sector last year has either paused or ended.
Still, while the outlook for commodity prices has improved dramatically over the past six months, Credit Suisse points out that it’s highly likely commodity prices will slide at the first sign of slowing global growth.
Simply put, a recovery in mining spending could be a tailwind to growth if global growth picks up but if global growth slows, mining spending will resume its downward trajectory only adding to the gloom.