An October 9th report from Credit Suisse Fixed Income Research titled “Risk appetite is near “panic” levels” notes that global industrial production growth dropped below 2% for September, highlighting the sputtering economies of EM nations and the very slow growth of developing economies, and the resulting lack of risk appetite from investors.
However, despite the current economic doldrums, CS analyst James Sweeney and team say that “…we expect only a mild slowdown. Despite ongoing weakness in China and emerging markets, developed market demand should remain robust enough to put a floor under growth – preventing a production collapse. Importantly, even after decades of globalization, developed market industries rely overwhelmingly on developed market demand, minimizing the risk of contagion from EM.”
No risk appetite means slow motion growth, but no recession
The CS report points out that global industrial production has slipped below its trendline again, and after a sluggish rebound in recent months, it looks like growth is already starting to roll over. Sweeney et al are projecting IP momentum (3m/3m% annualized growth) to reach a 2% peak in September before a slowdown. That said, despite the recent mini-rebound, 2015 is heading towards the worst year for global growth since 2009.
However, given that growth will be slow for a while, the CS team argues the chances of an “outright collapse” for the global economy are quite low. They argue there are three reasons the economy is likely to stabilize. First, ISM new orders (perhaps the best lead indicator for global IP) continues to indicate positive growth. Note that even following two months of decline, the new orders index is still at 50.1, just under the post-crisis average but well above recessionary territory. Furthermore, ex-China, national PMI new orders index levels are all above 50.
Second, policymakers in China appear to have poured in enough stimulus that a near-term bounce is probable by the end of the year. It could just be a short bounce, but any kind of a positive surprise from China would boost risk appetite, stabilize commodity prices and help support a number of struggling emerging markets.
Finally, developed market demand growth is likely to remain solid over the medium and long term. Keep in mind that consumer demand in both the U.S. and Europe is directly related to continued labor market improvements, and (ex-energy) investment by firms has remained strong in spite of the global slowdown (Exhibits 8 and 9).