Top economist weighs up the positive economic signs but warns of the prevailing negative narrative
Investors looking for encouraging green shoots in the economy have reasons to be cautiously optimistic, according to an industry insider.
Eric Lascelles, chief economist for RBC Global Asset Management, said these positive signs came mostly from financial conditions, which had tightened significantly over 2018 and were set to cast a considerable shadow over 2019 growth.
However, he said: “They have since eased due to the recent dovish pivot by central banks. The drag isn’t actually gone, but the negative impulse isn’t as bad as forecast at the end of 2018, and the peak drag on growth has arguably already past.
“To be clear, growth over the remainder of 2019 will continue to be weighed by financial conditions, but to a gradually diminishing degree, presuming there is no change in financial conditions from here.”
Lascelles added that the empirical aspect of looking for green shoots, tracking and interpreting data, is harder than usual right now, and has been complicated by the seasonal distortions of the Chinese New Year, a longstanding (but structurally diminishing) Q1 seasonal drag in the US, and the temporary damage of the US government shutdown.
“These make it more difficult than usual to assess whether growth is slowing, stabilizing or accelerating in the world’s two major markets,” he said.
However, he added that there were some promising “tidbits” of data:
- Some, mostly proprietary sellside, current activity indices have edged slightly higher, though certainly not all have (the Chicago National Activity Index continues to fall, for instance).
- Individual US data points such as jobless claims remain strong, and certain measures such as core capital goods orders have rebounded.
- China continues to deliver stimulus, and some leading indicators point to a stabilization in growth there.
- The global stock market has rebounded substantially since the start of the year. While some of this is an instinctual response to dovish central banks, some presumably reflects upgraded growth expectations due to the extra monetary support. Regardless of motivation, higher stocks create a positive wealth effect.
- Base metal and oil prices have been rebounding since last fall. The former, in particular, is a classic signal of economic demand.
There are significant caveats to these developments and a “powerful” negative narrative that also demands attention.
Lascelles believes that US fiscal stimulus has faded substantially relative to last year and drag of protectionism has strengthened. Also, downside risks such as the aging business cycle and an ominously inverted yield curve substantially outweigh upside risks.
He said: “From an empirical perspective, the key sources of worry are that PMIs are mostly still falling, while US industrial production also continues to roll over.
“Weighing the good against the bad, the proper conclusion at this juncture is that economic developments are no longer uniformly negative. This is notable, and welcome. However, it seems premature to suggest that growth is actively rebounding.”