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Global Economy: The Near-Term Business Bet

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By Peter G. Hall
Vice-President and Chief Economist Export Development Canada

Money talks. Right now, it’s telling us what business thinks about near-term growth. And a great gauge of this conversation is the opinion of purchasing managers. All over the world, buyers in companies, regardless of size or reach, are making daily decisions about acquiring the inputs needed to produce what they sell. They not only have to forecast their needs and striking prices, but they have to match these to expected future sales. In effect, they are forecasters who are continuously being assessed on their judgment calls. So, what are they saying these days?

Let’s start with the US. As America is the world’s growth engine, it’s critical to know what its buyers are saying. The news is not just good; it’s great. Manufacturers were discouraged by the poor winter weather, but they got over it; the index is now back to the heights seen last fall, and rising. New orders are leading the charge, up sharply in the last three months. Purchasing managers in the service sector are even more upbeat. New orders are surging there as well, lifting the composite index to its highest level since late 2005. One can either conclude that US business buyers have lost their marbles, or they see something coming that many others are missing. I’d bet strongly on the latter. So are the Americans alone?

They might be on the rise in a big way, but the Brits may give them a run for their money. The UK purchasing managers’ index is also soaring. Admittedly, it’s not as high as it was last fall, but at 58.8, it’s well ahead of the post-crisis average. Service activity, key to the UK economy, is leading the way, but buyers in the manufacturing sector are also upbeat, pushing close to post-crisis highs, and well above the growth-decline level.

The Euro area staged a long-awaited comeback in early 2013, and remains solidly in the moderate expansion zone. Services are doing better than manufacturing, which has swooned steadily since April. It remains in expansion mode, but only barely. The area-wide index reflects the trend in Germany, down since January, and similar moves in France and Italy. Although the down-trend among manufacturers has persisted, it is probably too early at this point to tell whether this is a temporary reaction to earlier US weakness, a reflection of geopolitical disturbance, or perhaps a more worrisome fundamental weakness in the pan-European economy, but it warrants continued attention.

Japan’s buyers have a more disturbing view. Purchasers there were wildly upbeat last October, but sentiment sunk in the spring. Thankfully, they are back into the positive zone, but only barely. Policy is a big factor in this volatility, as anticipatory activity and the post-policy backlash are both influencing real flows in the economy. The rebound in the weeks following the tax increase suggests that Japan is back into growth mode.

Is emerging market money saying the same? The HSBC composite index has see-sawed for three years. It’s currently on an up-trend, but has not decidedly broken out of its multi-year slow-zone. China’s story is much the same, although the recent numbers are inspiring. They followed the US down in the first quarter, and are likewise on a solid up-trend through July. Future progress is likely to depend on a blend of US and European economic direction, as China’s growth is increasingly dependent on international trade. For the moment, things appear to be on the up-and-up.

India is also showing positive movement among its buyers, and up-and-coming Indonesia is sporting a remarkable surge. Notably, Singapore, a regional and global bellwether, appears to be trending upward after a scare last December. Hopefully, its more prescient manufacturers are foreshadowing better times for trade flows in the region and across the planet. There is more that could be said about various other markets, but these together represent a large chunk of global business activity. Movements in recent months on balance point to global growth that is gaining momentum in a measured way.

The bottom line? Business is now placing bets on growth that will take us into 2015. Their verdict so far is that better times are ahead. Within the next week, a new bevy of purchasing managers’ intentions will be out. Now is a critical time to pay careful attention to their collective message.

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