The Science of Finance

Monthly economic overview

May 2013: Global G economy sees subdued start to second quarter

Monthly economic overview

Global economic growth slips to six-month low

Having held up well in Q1 to signal a rate of global GDP growth that was much improved on the threethree-year low of 1.4% seen in Q4 Q4, the global PMI dropped to a six six-month low in April to indicate a subdued start to Q2 Q2. Worldwide goods export volumes have risen over the past two months, but manufacturing growth remains disappointingly weak and eased in April. Meanwhile, subdued demand in many countries caused growth of service sector activity to slow to the weakest for ten months. months

Global PMI and economic growth

PMI 65 60 55 50 45 40 35 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 Global PMI Output Index Global GDP -5 0% -5.0% GDP annual % change 7.0% 5.0% 3.0% 1.0% -1.0% -3.0%

Global trade
Global PMI Manu. Exports p Index Global Manufacturing g Exports p y y/y% y

62 57 52 47 42 37 32 '98 '00 '02 '04 '06 '08 '10 '12

30% 20% 10% 0% -10% 10%

PMI Exports Index Global exports

-20% 30% -30%

Monthly economic overview

US leads developed world economic expansion, while the eurozone flounders

PMI Output Index (manufacturing & services) 65 60

Among the major developed countries, the US continued to see the strongest pace of growth, despite the rate having slowed sharply compared with the start of the year.

55 50 45 40 35 30 2008

Growth also eased in Japan, though remains in recovery mode compared p to the stagnation g seen in the fourth q quarter.

UK Eurozone US Japan
2009 2010 2011 2012 2013

Growth in the UK meanwhile improved to register the strongest t t upturn t since i the th OlympicsOlympics Ol i -related l t db boost t last l t August.

In contrast, an ongoing deep recession continued to be

Developed world PMIs

recorded in the eurozone.

Monthly economic overview

Signs of stalling growth evident across the largest emerging markets

PMI Output Index (manufacturing & services) 65 60

Measured across all emerging markets covered by the PMIs, output rose at the slowest rate since September 2011, registering the secondsecond-weakest performance seen in the last

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four years.
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Growth slowed to a six six-month low in China, while rates of

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China
40 35 30 2008

expansion were the weakest for a yearyear-and and-a-half in India and Russia. Brazil was the only BRIC economy to register faster growth in April, but even there the pace of expansion remained weak.

India Brazil Russia

2009

2010

2011

2012

2013

Worryingly, stalling or weakened service sector growth points

Emerging market PMIs

to a lack of growth of domestic demand in the worlds biggest emerging markets.

Monthly economic overview

S Korea tops manufacturing rankings, while France displaces Greece at bottom

South Korea pushed the US into second place at the head of the manufacturing PMIs league table in April. Japan was also a notable climber up the table table, up from 12th to 6th place place. France meanwhile displaced Greece at the foot of the table table, and Germany slid further down. In terms of manufacturing exports, the growth rankings were led by the UK for the first time in the global PMI series history, followed by South Korea and Japan.
Manufacturing PMI 55 March April 50

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40
Fran nce Spa ain Greece Italy y Pola and Aus stria Irela and Ger rmany Net herlands Den nmark Cze ech Rep. UK Can nada Switzerland Chin na WO ORLD Sou uth Africa Rus ssia Taiw wan Braz zil Viet tnam India Japan Turk key Indo onesia Mex xico US S Korea K

Monthly economic overview

No end in sight to Fed stimulus despite better-than-expected jobs data

US GDP grew at an annualised rate of 2.5% in Q1, up from 0.4% in Q4, but after allowing for inventories the pace slowed from 1.9% 1 9% to 1.5%. 1 5% Surveys suggest this slowdown persisted into Q2 Q2, with the all all-sector PMI (based on both Markit and ISM data) hitting a tenten-month low in April. Employment growth was meanwhile strongerstronger-than than-expected, driving the jobless rate down to its lowest since 2008. However, the rate of job creation is unlikely to encourage the Fed to start withdrawing stimulus any time soon soon, given the weak activity data data.

US PMI and economic growth

Composite PMI 67 62 57 52 47 42 37 32 2006 GDP PMI 2007 2008 2009 2010 2011 2012 2013 GDP q/q% GDP, 1.5 1.0 0.5 0.0

US non non-farm payrolls and unemployment

Unemployment rate (%) 11 10 9 8 Monthly change in payrolls (thousands) 600 400 200 0 -200 7 400 -400 6 Monthly payrolls change 5 Unemployment 4 2008 2009 2010 2011 2012 2013 -600 -800 -1000

-0.5 10 -1.0 -1.5 -2.0 -2.5

Monthly economic overview

Japans policymakers rewarded with growth upturn and rising price pressures
Japans PMIs showed growth easing from Marchs jointjoint-record high, but the pace of expansion remained consistent with over 1% quarterly growth in GDP GDP. Companies reported that improved confidence arising from recent stimulus packages and export gains from the weaker yen have helped revive growth. There were also promising signs in the fight against deflation. Manufacturers input costs rose at the fastest rate for over a yearyear-and and-a-half, and service sector costs showed one of the strongest increases since 2008 2008.

Japan PMI and economic growth

Markit Japan Composite PMI 57 52 1.0 47 42 -2.0 37 32 27 2006 GDP PMI 2007 2008 2009 2010 2011 2012 2013 -3.0 -4.0 -5.0 -6.0 0.0 -1.0 Japan GDP GDP, q/q% 3.0 2.0

Japanese input prices

PMI Input Costs Index 80 75 70 65 60 55 50 45 40 35 2008 2009 2010 2011 2012 2013

Manufacturing Services

Monthly economic overview

Euro area recession continues, with renewed downturn in Germany

The Eurozone PMI rose slightly in April, but the surveys continued to indicate a strong pace of economic contraction. Weakness is spreading across the region region, with steep downturns in France France, Italy and Spain now joined by a renewed downturn in Germany, where output fell for the first time since last November. The ECB reacted to the ongoing recession by trimming its main policy rate to an all all-time low of 0.5%, though few expect the cut to have a material impact.

Eurozone PMI and economic growth

Markit Eurozone Composite PMI 65 60 55 50 45 40 35 30 2006 GDP PMI -2.0 0.0 -1 0 -1.0 Eurozone GDP, GDP q/q% 2.0 1.0

Output by country
PMI Output Index (manufacturing & services) 65 60 55 50 45 40 35

Germany France Italy Spain p

2009 2010 2011 2012 2013

-3.0 2007 2008 2009 2010 2011 2012 2013

30

Monthly economic overview

UK economy starts Q2 on good footing, after better-than-expected growth in Q1

The April PMIs signalled the fastest rate of expansion in the UK since the Olympics Olympics-related growth spurt seen last August. A weaker currency boosted manufacturing exports, exports while construction output stabilised and activity growth picked up further in services. The improved survey data point to a good start to Q2 and, coming on the back of a betterbetter-thanthanexpected 0.3% increase in GDP in Q1 and above target inflation, meant the Bank of England saw no need for more stimulus at its May MPC meeting meeting.

UK PMI and economic growth

Composite p PMI 62 57 52 47 42 GDP 37 32 2006 PMI GDP, q/q% 1.5 1.0 0.5

UK manufacturing exports
U PMI Manufacturing UK a u actu g Exports po ts Index de 65 60 55 3m/3m 3 /3 % c chg ge exports po ts (O (ONS) S) 12 8 4 0 -4

0.0 -0.5 10 -1.0 -1.5

40 50 45

UK goods exports PMI New Export Orders

-8 -12 2008 2009 2010 2011 2012 2013

-2.0 -2.5
35 2007

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Monthly economic overview

Equities surge to new highs on central bank largesse

Global equities hit a postpost-crisis high again in early May, with the S&P 500 reaching an allall-time record. Earnings have not disappointed but the main thrust comes from central bank stimulus boosting asset prices disappointed, prices. However However, with the FTSE All World index some 25% above its average over the past 12 months, equity price momentum and the PMI are moving in opposite directions suggesting either improved equity sentiment will soon feed through to the real economy, or that stimulus is not having the expected impact on growth growth.

Worldwide equity prices

FTSE S All World o d Index, de , d divergence e ge ce from o 12 month o t a ave. e
60 40 20 0 -20 40 -40 -60 -80 -100 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 Global share price momentum Global PMI 35 40 55

% change since:
Global G oba PMI
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pre-crisis peak -11.2 6.6 4.3 -2.2 -37.2 -16 9 -16.9 -35.9 -63.1 -21.8

end of 2012 10.7 15.3 14.5 11.6 5.9 51 5.1 8.7 -1.0 37.4

last month 5.5 3.4 4.5 4.9 6.9 56 5.6 7.9 1.6 8.3

FTSE All World Dow Jones Industrial Ave. S&P 500 FTSE 100 Eurofirst 80 Dax 30

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CAC 40 Shanghai Composite Nikkei 225

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