Guest Post by Ned Davis Research
Global indicators show broad-based green shoots
A broad array of the global economic indicators that we watch closely point to tentative signs that the global recession will end fairly soon. Our analysis of lead times of economic and market-based data suggest a recovery in early Q3. Despite these green shoots, most economic data remains at historically depressed levels, indicating a long road until pre-COVID GDP is restored.
Recession model edges down
Our Global Recession Probability Model, at a reading of 99.2%, continues to suggest that the global economy is in its worst slump in the post-war era. But our index ticked down from its record peak of 99.8% in the prior month, its first decline since February. This suggests early signs that recession risks may be abating.
Furthermore, when the index has been in the high-risk zone but falling, as it is now, global equities have tended to see their most bullish performance.
Leading indicators pick up
Leading indicators also point to tentative signs of a global recovery. The OECD Composite Leading Indicator (CLI) for OECD countries plus six key nonmember economies (including China and India) surged a record 1.1 points in May to 95.4. This follows declines in 27 of the prior 28 months. Furthermore, nearly 85% of countries posted month-to month gains in their CLIs, the largest share since November 2016.
Even so, the overall level of the global CLI is the second-lowest on record, suggesting a bottoming at extremely low levels. Moreover, not one country recorded a CLI reading above its long-term average of 100, with most economies significantly below that threshold. This indicates that it will be some time before economies go back to their pre-COVID levels.
The global composite PMI, another timely proxy for the overall economy, surged a record 10.1 points in May, its first gain since the COVID crisis began, to 36.3 (see chart at right). While this is a significant increase, the overall level is still below the Global Financial Crisis (GFC) low set in November 2008.
PMIs show record rebounds but still below GFC lows
The manufacturing component picked up significantly in May, up 2.8 points to 42.4. Manufacturing is usually the cyclical sector of the global economy. As a result, it historically has done a good job of identifying turning points in the economic cycle.
But the COVID crisis took all sectors hostage, and in particular services, as mandated stay-at-home orders all over the world effectively brought the sector to a halt. But after three months of declines, the largest successive drops on record, the services PMI surged an unprecedented 11.5 points to 35.2. Despite the surge, this reading is still well below the GFC low.
PMI breadth has also improved, as most countries began easing their lockdown measures in May. On a month-to-month basis, almost all economies saw both their manufacturing and services PMIs jump. In fact, 100% of them saw their services indexes increase, the most since August 2009 (see chart at left), while 86% of economies recorded monthly gains in their manufacturing PMIs.
PMIs show record rebounds but still below GFC lows
Even so, the share of economies with expanding manufacturing and services industries remains historically low, at just under 10%. China, which was the first country to be impacted by COVID and also the first to begin to recover, is the only major economy showing expansion in these sectors. Services in particular lagged, as it took three months after China’s lockdowns for the sector to resume expansion.
One of the earliest signs of a global recovery came from sentiment. As shown on the chart at right, the Sentix global economic expectations index increased for a third straight month in June. In that month alone, the indicator jumped a record 19.4 points to 21.7, the highest level in nearly 16 years.
Net positive readings like this have historically been associated with economic expansion.
Economic expectations surging
Data surprising to the upside
Economic data has also been surprising to the upside, according to Citigroup economic
Economic data surprising more and more to the upside
The developed market index has become much less negative, jumping a near-record 83 points over the past month. The surprise index for emerging markets has also surged over the past few months, currently hovering around its highest level in over three years.
Data has been beating the consensus broadly among countries. As seen in the chart at left, the share of economies whose surprise indexes are net positive (i.e., data on average is beating the consensus) and have been rising over the past months are at their highest levels since before the COVID pandemic.
Lead times suggest near-term recovery
With broad-based improvement in these indicators, we are becoming increasingly confident that the global recession, while the deepest in recent history, may not last much longer.
The table below shows the median lead times of our global recession watch indicators to the end of global recessions. The median lead time of all the indicators is 4 months, with individual instances varying between 1 and 13 months.
Most of our recession watch indicators have shown tentative signs of bottoming
As you can see, a majority of the indicators, most of which we discussed in previous pages, have carved out tentative bottoms in recent months. If sustained, the lead times suggest that the global economy could come out of recession in the early part of the third quarter.
This outcome, however, comes with risks. The threat of a second wave of the COVID outbreak will likely increase over the next several months as economies reopen without a vaccine. Depending on the severity of a potential outbreak and how governments react, this will determine whether we’ve truly observed the bottom in downside risk. If governments keep the economy open, but maintain strong social distancing rules and/ or just target COVID hotspots, as opposed to complete lockdown, the outcome could be less damaging for the economy.
The global economy had been experiencing slower global growth prior to the COVID outbreak due largely in part to the trade war. Tensions reigniting between the U.S. and China also pose a near-term risk.
Asset classes also point to near-term recovery
Most major asset classes, such as equities, commodities, and the dollar, have responded to the risk-off environment associated with global recession. However, most also tend to revert to risk-on mode before recession end.
The table below (Lead time of asset classes also point to near-term economic recovery) shows the lead times of this market-based data to global recession end. It also shows that like the aforementioned economic indicators, most of the risk-on indicators appear to have bottomed, while some of the risk-off ones have topped.
Global equities and commodities tend to bottom around a median of five months before recession end. With equities and commodities showing tentative bottoms in March and April, this argues for a global economic recovery in the second half of this year.
The dollar has historically increased in the early stages of global recessions, most consistently during the severe downturns, before peaking a median of six months before recession end. But there have been much shorter lead times historically, such as in 1983 and 2009, when the dollar topped a month or two before the end of recession. As of now, it appears that the dollar carved out a peak in April.
The two hold outs are the Barclays global aggregate and gold. The bond index, however, has historically peaked around the same time global downturns have ended. Gold’s safe haven status varies over time, driven more so by secular trends, as opposed to cyclical movements.
This content was provided by Ned Davis Research – See NDR Disclosures
Investment Advisory Services offered through BCJ Capital Management LLC., an (SEC) Registered Investment Adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed, and past performance is no guarantee of future results. For specific tax advice on any strategy, consult with a qualified tax professional before implementing any strategy discussed herein.
BCJ FG 20-71