HSBC on why it's not time to panic about a global economic slowdown just yet

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  • Some lead indicators suggest the global economy is slowing.
  • HSBC says it’s too early to tell whether this is temporary or the start of a longer-lasting trend, especially given possible seasonality impacts from Chinese New Year holidays.
  • It says recent strength in the copper price suggests global activity levels aren’t in “freefall”.

After a broad-based recovery in 2017, the global economy looks like it’s lost a bit of momentum in recent months.

Lead economic indicators such as Purchasing Managers Indices (PMIs) have turned lower across most of the globe, including in Asia.

Just take a look at this excellent heat map from HSBC Bank showing the broad slowdown in manufacturing PMI and new order readings across Asia over the past three months.

Source: HSBC

For clarity purposes, dark red indicates a faster improvement from a month earlier while light red shading points show a slower pace of growth. Grey signals that activity levels fell.

Clearly, there’s been a broad slowdown from the beginning of the year, mirroring what has been seen in other major economies, both advanced and developing.

“Most manufacturing PMIs pulled back in March, although only Korea, Malaysia, and Thailand suffered contractions over the month in Asia,” says HSBC.

“A number of high-frequency indicators signal a remarkably sharp drop in activity, though not uniformly.”

So has the peak in the current global economic upswing already been seen, paving the way for a potential slowdown in the quarters ahead?

And, more importantly for investors, is it time to dump cyclical-linked assets in favour of those less aligned with the economic cycle?

In HSBC’s opinion, it’s not time to panic. Yet.

“Is the global industrial cycle in freefall? Hardly,” it says. “PMIs have pulled back after a good run, and they point more to stabilisation than a nasty plunge in activity.”

It also cautions that China’s increasing dominance of the global economy makes it hard to discern whether this is the start of a broader slowdown given the timing of Lunar New Year holidays.

“Trouble with all of this is that Chinese New Year distortions, not just locally, but globally, too, with the economy’s rapidly growing size, make the latest data crop hard to read,” the bank says.

“For the full picture, we’ll probably have to wait for April numbers to come in, as well as harder numbers as opposed to surveys.”

In the interim, HSBC points out that the copper price — deemed to be a good proxy for activity levels in its opinion — has recovered in recent weeks, hinting the slowdown in the PMIs in February and March may not signal the start of a longer-lasting deterioration trend.

Source: HSBC

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