JP MORGAN: 'Dog days' for the global economy may not be over just yet

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Disappointing global growth in the first half of the year may not have been an aberration. Given the first set of global indicators for July, it may have been the beginning of an ongoing trend.

That’s the downbeat assessment from JP Morgan’s economics team, who believe the recent flash manufacturing PMI gauges released for China, the Eurozone and the US last week suggest the outlook for global activity in the third quarter may remain weak.

Here’s JP Morgan on the disappointing manufacturing surveys:

“The message in the July flash manufacturing PMIs was also downbeat. Although the output reading ticked higher, it is continuing to track a pace of production growth close to 2%, well below what is consistent with our current quarter GDP forecast. Most troubling was the continued loss of momentum in forward-looking indicators in the survey. With new orders slipping and the finished goods inventory bouncing higher the orders to inventory ratio is on track to decline to its lowest level in more than two years”.

According to Morgan Stanley, the performance of the world’s second-largest economy, China, was largely behind the weakness. The nation’s flash manufacturing PMI gauge slipped to 48.2, the lowest level since April 2014. At 47.3 the manufacturing output sub index was particularly weak. Given the relationship that exists between global manufacturing output and manufacturing output PMI gauge, shown in the chart below, the weakness in China creates doubts over the strength of global activity in the quarter ahead.

“The July global flash PMI readings were weighed down by the plunge in China’s output reading to 47.3 amid a big rise in its finished goods inventory. With commodity prices also dropping this month, the PMI slide challenges our assessment that China picked up steam as it moved through midyear. Indeed, the contrast with recent activity readings is striking as industrial production and commodity imports rebounded smartly”.

JP Morgan says the full set of July activity indicators (PMI reports) — due in two weeks — will be central in guiding their view on the global economy’s trajectory. Given weakness in the flash PMI reports, “recent news skews risks firmly to the downside of our current quarter 3% global growth projection”.

In other words, the dog days for the global economy may not be over just yet.

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