The chart below shows synthetic indices from PMI/Markit and ISM surveys for the manufacturing sector in different large regions of the world.
What is important to catch is the kind of common dynamic with almost no divergence between the lines. All the lines except Japan were close to 55 in 2009/2010 during the recovery. They are all now close to 50 which is the level where activity does not change from one month to the other. There is no recent break on the upside or on the downside. (When I mention simple in the title is just that we can imagine a common dynamic and no divergence)
The second point to notice is that there is no leader; there is no region or country that is able to place the world economy on a strong trajectory. That’s the main point we have to keep in mind. There is no driver that could spill over to the world and leading to a global improvement.
At first sight the PMI/Markit world index is still following a poor dynamic. It was at 50.6 in May after 50.4 in April thanks to Japan, UK and the US PMI index.
In the USA there are two indices. One is coming from Markit, it is the USA-PMI on the chart and is above 50 at 52.3. The other is the famous ISM which dropped below 50 in May at 49. It’s its first time below 50 since spring 2009 (in November 2012 it was at 49.9 after hurricane Sandy). We cannot see the USA as a strong driver for the world economy. These figures show that there is no reason to expect higher long term interest rates higher in a foreseeable future.
In BRIC countries (Brazil, Russia, India, China) the momentum is negative. The strong driver that was associated with emerging countries no longer exists. China and India indices were weak in May; below 50 in China at 49.2 and at 50 (50.1) in India. (See here for details). In Brazil and Russia indices are above 50 but weakly at 50.6 and 51.5 respectively. None of these two economies has the size to become a leader in the short run.
In Japan and in the United Kingdom there is a strong improvement. Both of them are above 50. We cannot expect a strong impetus as they both try to find their way to converge to a growth trajectory.
Euro Area, even if I like the new momentum in trade (see here), is still a drag for the world dynamic with an index well below 50.
Looking at the world economy through the lens of surveys, it can be seen that we are close to stabilization but that we cannot expect a rapid and strong improvement. There is no leader that could change rapidly the picture. That’s why the current situation is specific and very different from what we’ve seen in the past.
In this environment we cannot imagine that Bernanke and Yellen at the Federal Reserve will rapidly taper asset purchases. The world economy is not strong enough. Reducing the Fed’s purchases would lead to a weaker global environment as capital flows would leave emerging countries going back to the USA. Moreover what we see here is that probably the US economy is still too fragile to be able to amortize a upside shock on interest rates (remember 1937/1938, see here)
The ECB has room to ease further its monetary policy. The European Commission recommendations last week are still tough on fiscal policy convergence to the 3% target. Policy mix recommends a looser monetary policy that could be ECB contribution to world growth and employment