International Economic Week In Review: The IMF Predicts Lower Global Growth, Edition

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Includes: ADRU, AUSE, DBAU, DBEU, DBEZ, DBJP, DBUK, DXJ, DXPS, EEA, EPV, EURL, EWA, EWC, EWJ, EWU, EWV, EZJ, EZU, FAUS, FCAN, FEEU, FEP, FEU, FEUZ, FEZ, FIEU, FJP, FKU, FXJP, HAUD, HEDJ, HEGE, HEGJ, HEWC, HEWJ, HEWU, HEZU, HFEZ, HFXE, HFXJ, HGEU, HGJP, IAF, IEUR, IEV, JEQ, JPN, JPNH, JPNL, JPP, JPXN, QAUS, QCAN, QGBR, RINF, SBEU, UPV, VGK
by: Hale Stewart

On Monday, the IMF's Christine Lagarde gave a speech that noted global growth prospects were now lower:

Overall, the global outlook has weakened further over the last six months-exacerbated by China's relative slowdown, lower commodity prices, and the prospect of financial tightening for many countries. Emerging markets had largely driven the recovery and the expectation was that the advanced economies would pick up the "growth baton." That has not happened.

Indeed, for many advanced economies, the recovery is proving more moderate than anticipated. In the United States, growth is flat due partly to the strong dollar; in the Euro Area, low investment, high unemployment and weak balance sheets weigh on growth; in Japan, both growth and inflation are weaker than expected.

While emerging markets are a very diverse group, the story is broadly similar. China's transition to a more sustainable economic model - which is good for China and the world - means that its growth rate, while still strong, is lower. Downturns in Brazil and Russia are larger than expected. The same is true for the Middle East - hit hard by the oil price decline. Many African and low-income nations also face diminished prospects.

Others making this observation include the World Bank, OECD and Gavyn Davies of the Financial Times. Although LaGarde specifically mentioned fiscal policy as a potential remedy, the political will doesn't exist to implement this option.

The RBA maintained rates at 2%. Their statement contained an interesting observation on the Australian housing market: "Low interest rates are supporting demand, while supervisory measures are working to emphasise prudent lending standards and so to contain risks in the housing market." Several years ago, there was concern that the Australian housing market was in a bubble. However, banks are now more aggressive regarding loan applications:

According to the chart, it appears loan applications have peaked. And loans for investors are lower, which will, in turn, lower selling pressure in the housing market. Other news releases were mixed. Monthly real retails sales were flat. The AIG manufacturing index increased 4.6 points to 58.1 - the highest reading since 2004. 5/8 sectors were growing, while all the sub-indexes were above 50. In contrast, the service sector contracted last month; the overall index dropped 2.3 points to 49.5. While 4/5 sub-indexes declined, most sectors (6/9) grew. Finally, construction contracted for the fourth consecutive month, with a reading of 45.2. Two of four sectors contracted.

Japanese news continued to disappoint. The Markit service index's headline number was 50, with output and new orders unchanged from the previous month. And the Japanese-issued LEI/CEIs both declined, with the LEIs fell from 101.9-99.8 and the CEIs dropping. These Japanese-released indicators moved sideways for the last year. The Conference Board also issues these indicators for Japan. Their results aren't much better:

Click to enlarge

Japanese news has been bearish since the first of the year; these week's numbers add to the development.

Two agencies released two UK data points. Markit's construction index was 54.2. Commercial and engineering sectors expanded, while residential contracted:

Market participants stated that "Brexit" was creating heightened uncertainty. The worst news, however, was the large Y/Y drop in production:

Total production output is estimated to have decreased by 0.5% in February 2016 compared with the same month a year ago, the largest fall since August 2013. The largest contribution to the fall came from manufacturing, which decreased by 1.8%. This was the largest fall since July2013, when it fell by an equal amount.

The following chart places the data into a longer-term context:

Production dropped in three of the last four months, while manufacturing declined in four of the last five. The UK economy remains one of the word's bright spots. But as Brexit approaches, the increased uncertainty will probably continue to hurt economic performance.

Finally, Canadian news was positive. Building permits increased 15.5% M/M. But placing this data in context, notice that we've really seen this data point move sideways for the last year:

And the unemployment rate decreased .2%: