Skip to Content

Share this post

Chart of the week: Are bond investors too pessimistic on global growth prospects? 

27 March 2019

Bob Cunneen, Senior Economist and Portfolio Specialist

 

Global economic activity vs Manufacturing surveys

* The countries collectively known as the Group of Seven (G7) consists of the US, Canada, the UK, France, Germany, Italy and Japan. BRIC refers to Brazil, Russia, India and China.

Source: Markit


Some investors have become alarmed about global growth over recent weeks.  Both German and Japanese bonds are now registering negative interest rates. Essentially these government bond investors are prepared to give up any interest rate benefit for the perceived ‘safe haven’ of preserving their capital.

Admittedly the global economy has disappointed in the past year. Global gross domestic product (GDP) growth has slowed to a 3.5% annual pace at the end of 2018 compared to the 4% growth at the start of the year (blue line). There has been a multitude of negative influences driving this global slowdown. Concerns about President Trump’s ‘trade wars’, the Federal Reserve (Fed) raising US interest rates and China’s tighter credit conditions have all weighed on global growth.

One troubling indicator of potential problems ahead are the Purchasing Managers’ Indexes (PMI) for manufacturing. A simple average of the PMIs for US, China, Europe and Japan has fallen below 50 in March. This suggests that the global manufacturing sector is sliding towards a recession (red line). While this is concerning, this also needs to be placed in context. Firstly, this measure only covers the relatively small manufacturing sector.  The larger services component of the global economy has been more resilient with its PMI at a much healthier 53 level in February. Secondly, weak PMI manufacturing results also occurred in both the 2012 European debt crisis and the 2015 China slowdown without seeing a global recession.  So bond investors appear to be very premature in their pessimism.


Important information


This communication is provided by MLC Investments Limited (ABN 30 002 641 661, AFSL 230705) (“MLC”), a member of the National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686) group of companies (“NAB Group”), 105–153 Miller Street, North Sydney 2060. An investment with MLC does not represent a deposit or liability of, and is not guaranteed by, the NAB Group. The information in this communication may constitute general advice. It has been prepared without taking account of individual objectives, financial situation or needs and because of that you should, before acting on the advice, consider the appropriateness of the advice having regard to your personal objectives, financial situation and needs. MLC believes that the information contained in this communication is correct and that any estimates, opinions, conclusions or recommendations are reasonably held or made as at the time of compilation. However, no warranty is made as to the accuracy or reliability of this information (which may change without notice). MLC relies on third parties to provide certain information and is not responsible for its accuracy, nor is MLC liable for any loss arising from a person relying on information provided by third parties. Past performance is not a reliable indicator of future performance. This information is directed to and prepared for Australian residents only. MLC may use the services of NAB Group companies where it makes good business sense to do so and will benefit customers. Amounts paid for these services are always negotiated on an arm’s length basis.