Gauging global economic momentum

Please note: This article is more technical in nature than our typical articles, and may require some background knowledge and experience in investing to understand the themes that we explore below.

All data referenced in this article are sourced from Bloomberg unless otherwise stated, and is accurate at the time of publishing.

Key points

• With all eyes on November’s US election race and the central bank’s recent rate cut understanding the health of the global economy can be difficult. Our set of economic momentum indicators seeks to provide more clarity on the actual state of play.
• The US is seeming ever-more crucial to the global economy’s momentum. Economic activity is currently neither gaining nor losing steam, while the slowdown in the labour market is decelerating. As such, while not soaring, the country seems to be in a healthy state.
• China is going through a difficult transition phase. Our momentum indicators reflect the hit to consumption being seen as consumers look to repair debt-ridden household balance sheets. Meanwhile, in the eurozone, Germany’s consumers are failing to hit the high street in droves and holding back otherwise healthier signs in many other parts of the bloc.
• A potential intensification of tariff wars appear to be one of the biggest short-term risks facing the global economy. For the longer-term, China’s battle with a balance-sheet recession and deflation appears to be one of the most significant risks.

As the noise around the US election race grows louder and financial markets react to recent central bank rate cuts, it can be difficult to make sense of it all. For this reason, we turn to our macroeconomic momentum indicators, which blend several economic data prints into a range of areas into simple momentum gauges (see Tuning to the macro beat).

Looking at key developed and emerging market economies and the information extracted from purchasing managers’ surveys, business surveys and other sources of so-called “soft” data, the short-term momentum seems to be reflective of what we anticipated in our Mid-Year Outlook 2024: The US economy is on track for a soft- or no-landing, European economies are on a sluggish and bumpy recovery and the Chinese economy is struggling to hit target growth this year, suffering from its debt-ridden consumers.

The direction in which the global economy tips crucially depends on the way the US economy performs. Therefore, in this article, the US economy is analysed in more detail. We then discuss the Chinese economy and why investors should know more about the term-balance-sheet recession, before turning our attention to Europe and a close-up view of the region’s consumers.

Momentum in economic activity surveys

Latest-month short-term momentum in economic activity surveys (soft data) based on proprietary Macroeconomic Momentum Indicators. Values below zero (blue) indicate deceleration in momentum, values above zero (red) indicate acceleration

US economy avoiding a crash landing, so far

In terms of economic momentum, the US economy appears to be lowering its cruising altitude rather than come to a landing. Hard activity data prints have been mixed over summer while the supposedly more forward-looking soft indicators have not accelerated any further (see chart). 

US momentum: lowering cruising altitude

Short-term momentum across different US economic indicators. Values below zero (red) indicate decelerating momentum, values above zero (green) indicate acceleration

The US labour market has some pundits worried about worse things to come, while others are pondering the effects of immigration, and how the post-pandemic surge in immigration to the US might make traditional survey-based indicators, like non-farm payrolls or unemployment claims, too pessimistic as gauges of tightness in the labour market. 

Our gauge for the labour market, which is based on eight different data series and may suffer from the same bias due to immigration, suggests that the rate at which the labour market is deteriorating has already slowed in August. 

Consumption, on the other hand, which may profit from unexpected immigration, has swung around after weak readings leading up to July. With this in mind and the prospect of monetary policy easing, the US economy, while not soaring, is looking healthy. 

Chinese economy struggling with household debt

India’s overtaking of China as the most vibrant emerging markets growth engine has been widely discussed. Now, however, the latter economy faces tensions in trade and a consumption slump on top of structural issues in demographics and indebtedness – all of which could slow its growth rate to that of the average emerging market by next year. The troubling news is that a textbook monetary or fiscal stimulus might not help to cure the woes of Chinese businesses and consumers. 

A recent Chinese housing crisis has slashed household wealth in such a way that consumers are fully focused on paying off their debts, which have grown in size relative to the assets that lost value. As such, stimulus will not stimulate consumption but rather go into debt reduction, which does not invigorate the economy. 

Parallels can be drawn with the so-called balance sheet recession¹ that hamstrung the Japanese economy after its asset-bubble burst in the early 1990s. For decades, Japan’s ever more unorthodox policy interventions failed to produce inflation nor banish the fears of deflation.

Rather than decades, the Macro Momentum Indicators focus on the very short term. But since November last year, Chinese consumption momentum has decelerated. Economic activity surveys (see world map) do not suggest that a pick-up is on the horizon soon. 

Europe’s mixed consumption momentum slows recovery

Currently, the glaring weakness in Europe’s recovery according to our momentum gauges is the German consumer (see European map). The country’s consumption expenditure, in real terms, has not yet recovered its pre-pandemic level and the fading momentum has picked up speed between April and the latest reading in August. 

The rest of the eurozone, however, has more than made up for the German slump in terms of consumption, such that the bloc’s total consumption, in real terms, is close to 5% above its pre-pandemic level. But current consumption momentum in other European economies confirms a fragile and bumpy recovery.

Consumption momentum in Europe

Latest-month short-term momentum in consumption based on proprietary Macroeconomic Momentum Indicators. Values below zero (red) indicate deceleration in momentum, values above zero (green) indicate acceleration

Trade is the short-term risk

Our momentum gauges are designed to better help investors understand the numbers coming out of the key US economy, while providing a gauge on the European recovery. They also point to a deteriorating Chinese economy, but with much less data available, and so more caution in interpreting the results seems warranted.

Without any doubt, however, investors should be conscious of the near-term vulnerability of global economic momentum to a tariff war, as discussed in Anticipating the US presidential election. Many export-oriented economies, such as Germany or China, are already ailing and much relies on the US economy to thrive and power global growth.

For the longer term, much focus should be kept monitoring the Chinese battle with a balance-sheet recession and deflation. Japan’s experience in recent decades against similar headwinds in this regard might provide many valuable lessons for policy makers of what to avoid, as well as a script for what investors might expect.