Global economic growth is showing some tentative signs of recovery as the eurozone and China post GDP numbers that beat market expectations.
Putnam's Global GDP Nowcast indicates economic growth has picked up quite sharply over the past month. The eurozone's economy grew a seasonally adjusted 0.4% in the first quarter of 2019 from 0.2% in the fourth quarter of 2018. China's economy expanded 6.4% in the first quarter from a year earlier, beating expectations. The U.S. economy also grew at a faster pace than expected in the first quarter. Still, we are hesitant to put too much emphasis on the improvements in the data.
Eurozone may be turning a corner
There were a few genuinely good signs in the eurozone. In France, domestic demand picked up regardless of the ongoing disruptions caused by the protests. In Germany, household consumption increased despite the struggles of the export-oriented manufacturing sector. While the overall potential growth rate remains low, domestic services are doing well. The globally integrated manufacturing sectors, however, face challenges. In the April macro report, we wrote that global manufacturing is still struggling with all the consequences of the Trump administration's trade policies.
The region's growth rate is typically not very volatile. It has a large public sector and powerful automatic stabilizers in a downturn. We expect manufacturing will pick up as political tensions ebb. China's recovery will also benefit Europe's large exporters this year. But there are headwinds. The latest round of U.S.-China trade talks ended on May 10 without a deal. China imposed tit-for-tat tariffs on U.S. exports. So, there will be a limit to the upside in eurozone exports from growth in China, while the confusion surrounding Brexit is unlikely to dissipate over the next few months. We expect the eurozone's economy to expand at a slow pace.
China shows renewed signs of life
The world's second-biggest economy grew slightly more than expected in the first quarter of 2019. Industrial production and retail sales also rose in the first quarter. The People's Bank of China (PBoC) has dialed back some of its monetary stimulus as the economy strengthens. It tightened liquidity via its medium-term lending facility, pushing 3-month rates higher. The PBoC plans to maintain the growth of money supply and not step up counter-cyclical measures, according to an April statement. It plans to focus on supporting small and medium-sized enterprise (SMEs) financing, limiting leverage, and ensuring financial stability.
Still, we are cautious about the near-term outlook. As we have said before, the timing of the Lunar New Year makes it difficult to interpret the data, and the manufacturing sector grew slower than expected in April. The markets may be pricing in a stronger and earlier recovery in China than what is actually underway. The PBoC's statements also make us cautious. A focus on structural reform signals that China is pleased with growth. But growth will not be buoyed by new measures. And if growth strengthens, it may be met by some tightening. China's ability to sustain global demand is unclear because that depends on trade patterns and financial flows.
U.S. economy faces headwinds
Our U.S. GDP Nowcast* has not been very volatile. It has been hard to tease a coherent story out of recent data given the distortions created by the government shutdown, the winter months, and businesses trying to deal with trade policies. The economy grew at a 3.2% annual rate in the first quarter of 2019, a far better outcome than expected. But the headline growth mainly reflected inventory rebuilding and net trade. Real final sales to domestic purchasers, which is simply GDP minus inventories and trade, rose at only a 1.4% annualized pace. We believe the "true" pace of U.S. growth will be between 1.4% and 3.2% and will be a bit weaker in the second half.
The manufacturing sector still reflects global risks, including trade policies. Corporate investment remains lackluster. The labor market is strong, but there are hints that it may be turning. While hiring rose in April and unemployment fell to a 50-year low, wage gains eased. The key issue is the economy's ability to generate jobs without wage pressures. There are also policy headwinds. The fiscal stimulus from the 2017 tax cuts is waning. Last year's rate hikes are still working their way through the economy. While yields on long-term Treasury bonds have declined, rates on short-term notes are holding steady. Short-term rates influence household spending, consumer debt, auto purchases, and credit cards. As debt service burdens rise, so do economic stresses. A stronger dollar, rising stock markets and a relatively high policy rate are creating headwinds for the economy.
*We base our U.S. GDP Nowcast on a tailored methodology that captures daily data releases for the most essential growth characteristics for the United States, including purchasing managers' index data, industrial production, retail sales data, labor market metrics, real estate price indexes, sentiment indicators, and numerous other factors. The mix of factors used may change over time as new indicators become available from data sources or if certain factors become more, or less, predictive of economic growth.