- The slowdown in the global economy is getting worse, according to the latest UBS now-cast global growth model.
- Momentum is decelerating in both developed and emerging markets, led by weakness in the external sector.
- Weakness in cyclical assets in late 2018 were largely driven by global growth concerns. However, major central banks have reacted to those concerns over the past week, allowing beaten down assets to rally.
The global economy is going from bad to worse with momentum continuing slow sharply in the final weeks of 2018, according to the latest UBS global growth now-cast.
“We are now tracking Q4 global growth at only 2.7% annualised quarterly,” says Arend Kapteyn and Pierre Lafourcade, members of the UBS global economics team.
“That’s the 6th lowest percentile post-crisis, and about 150 basis points below the read for the first half of 2018.”
The global growth now-cast uses 210 data variables across 25 countries, breaking the results down by both developed and emerging markets. The performance is tracked by “external”, “domestic” and “other” factors, and is based on both soft and hard data points.
As UBS explains, weakness in the latest data was widespread.
“Emerging and and developed markets (EM and DM) are roughly equally bad,” said Kapteyn and Lafourcade.
“EM growth is tracking at 3.95%, versus a post-crisis average of 5.4% and average of 5.7% in the first half of 2018, and DM at 0.9% versus a post-crisis average of 1.8% and first-half of 2018 average of 2.2%.
“Compared to our early December update, that’s an additional 40 basis point loss of growth momentum over the last four weeks for both EM and DM.”
The slowdown is getting worse, not better, in other words. And it’s being seen across both developed and developing economies.
Kapteyn and Lafourcade say the recent deceleration was largely driven by “hard” data, which measures actual economic activity, rather than “soft” data which captures sentiment towards current economic conditions.
“At a global level, the incremental deterioration came entirely from ‘hard’ data. Growth implied by soft data is still running at 3% and the weakness was entirely in hard data,” they said.
“The contribution of the hard and soft data to the full model’s now-cast is skewed.
“Globally 70% of the weakness is being driven by deteriorating hard data, versus 30% by soft data. That split is 80/20 for DM and 60/40 for EM.”
While actual economic performance drove the latest slowdown in the now-cast model, as seen in the charts below, regardless of the state of economic development, both soft and hard data points are all weakening fast.
UBS says the most acute area of weakness came from the model’s external sector components, defined as manufacturing, trade data, orders and inventories, and manufacturing PMIs.
“The contributions to the now-cast form three broad groupings of data — ‘external’, ‘domestic’ and ‘other’ — which largely confirms our earlier intuition: the trade cycle is doing most of the damage,” Kapteyn and Lafourcade say.
“For 2018 as a whole, the external variables account for 57% of the weakening at a global level, domestic variables for 15% and ‘other’ for 25%.”
The latest modeling from UBS helps explain the steep declines in cyclical assets in late 2018, driven by heightened concerns that global economic growth was faltering at a time when monetary policy and financial conditions were tightening.
Over the past week, policymakers at the US Federal Reserve and People’s Bank of China have responded to these concerns, helping to explain the bounce in those assets that were hit the hardest in the selloff late last year.
While the delivery or prospect of easier monetary policy settings has helped alleviate the selling pressure, a further deterioration in the economic data ahead could see previous concerns about valuations reassert themselves.
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