- Outside of the United States, economic data has been disappointing more often than not in recent months.
- Europe, in particular, has seen downside economic surprises lift back towards levels last seen during the GFC.
- The recent trends are in stark contrast to those seen in 2017, raising questions over the whether the much-vaunted “synchronised global upswing” is losing momentum.
At the end of 2017, the global economy was looking better than at any point in the post GFC-era.
US tax cuts had just been introduced, economic data was strengthening and forecasts for GDP growth were being revised higher.
The synchronised global economic recovery was not only underway but accelerating, sending stocks, commodities and growth-linked currencies like the Australian and New Zealand dollars sharply higher.
However, just a few months on, the prospects for the global economy and growth-linked assets are looking less convincing.
Stocks have been volatile, snapping what appeared to be a near-unending period of tranquility, as geopolitics and concerns over the outlook for global monetary policy settings began to weigh on market valuations.
Other growth-linked assets have also come under pressure, albeit to a lesser degree.
While the prospect of higher interest rates and geopolitical threats have, understandably, taken their toll on markets, perhaps they’re not the only factors behind the recent bout of volatility.
As seen in the chart below from Deutsche Bank, economic data is now surprising to the downside, rather than upside, in most parts of the world, raising questions as to whether the synchronised global economic recovery that sent risk assets sharply higher earlier this year has suddenly started to turn.
“How quickly things change,” says Tim Baker, FX Strategist at Deutsche Bank.
“It was only a couple of months ago that global growth was in full stride, and synchronised across the world. Notably, in mid-January, every G10 country had positive data surprises, the first such occurrence since 2006. But the change since has been swift. Now only one G10 country has positive data surprises — the United States.”
This second chart shows how, after underperforming most other major nations in the middle of last year, economic data in the US has been surprising to the upside this year, a performance in stark contrast to that seen everywhere else.
In particular, economic data from the Eurozone has disappointed many an economist this year with surprises to the downside lifting to the highest level since the GFC.
“Euro area data surprises have collapsed, and are closing in on post-2009 lows,” says Baker. “That follows a record streak — 360 trading days — of positive data surprises.”
The sudden increase in eurozone downside surprises is seen in the chart below.
Baker says that data surprises across the region have now moved beyond soft, sentiment-driven indicators like business confidence and PMI reports, and are filtering through to hard economic data such as industrial production and inflation.
“The market seems to be holding its breath to see where the European growth pulse settles,” Baker says.
That’s the question investors are clearly pondering at present, be it in the euro area or elsewhere, perhaps helping to explain recent profit-taking across riskier asset classes.
While recent data from around the world has hardly been horrible, it’s clear that after consistent strength for the best part of two years, expectations for global growth have increased markedly, making it far easier for data to disappoint.
It has resulted in a timely reality check to investors.
In time, recent disappointments should also lead to a lowing of market expectations, raising the potential for data to start to beat again, a factor that could help to support growth-linked assets once more.
However, if the data continues to disappoint in the months ahead, even with lowered expectations, the selloff we’ve seen over the past few of months could extend for sometime yet.