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De-synchronised global growth – implications for investors

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Key points

  • The global economy has become de-synchronised. While the US economy has slowed significantly the rest of the world is doing fine.
  • This is favourable for share markets and commodities, but means the trend for the US dollar (US$) is likely to remain down (up for the Australian dollar (A$)).


While the US economy has slowed sharply over the last year the rest of the world remains robust. The de-synchronised nature of the global economic cycle was evident in the International Monetary Fund (IMF) recently revising down its US growth forecasts but leaving its forecast for global growth this year unchanged, and next year’s at around 5%, with upwards revisions to growth virtually everywhere else. This note looks at the key drivers of global de-synchronisation, whether it is sustainable and what it means for investors.

The US economic downturn

Recent US economic data has been very soft. The US economy grew just 1.3% annualised in the March quarter (or 2.1% year-on-year). Housing has led the downturn, resulting in a slowdown in manufacturing and now consumer spending. However, our view remains that the US economy is going through a mid-cycle growth slowdown (like those of the mid-1980s and mid-1990s) with growth likely to average around 2% this year.[1] Interest rates have not been raised aggressively, and other extremes that precede recessions such as talk of new eras, over-investment, excessive speculation or major share market overvaluation are not evident. The US mortgage crisis is unlikely to lead to a generalised credit crunch dragging the economy down. March quarter growth data in the US is also not as poor as it seems, as net exports, inventories and defence spending came in far weaker than expected and should rebound.

The de-synchronised world

While the US has slowed significantly, the rest of the world has held up remarkably well. This is evident in business condition indicators in the US, Euro-zone and Japan. While the US ISM manufacturing index has been in a softening trend since 2003, the Japanese Tankan business survey has remained strong and the German IFO business conditions index has strengthened (indicative of other business conditions surveys across Europe). This is shown in the next chart, with standardised index levels for each survey. This is very different to the lead up to the global downturn earlier this decade when Japanese and European indicators quickly followed the US down.

The divergence between the US and the rest of the world reflects a range of regional specific considerations.
  • Despite rising interest rates and the strong Euro, growth in Europe is strong, as economic reforms in Germany are leading to a renaissance of the German economy with improved productivity and falling unit labour costs. This is spreading across Europe due to much improved corporate balance sheets and improving labour market conditions boosting domestic demand. Euro-zone unemployment is now at a 25-year low. Easy monetary conditions and improving confidence are driving strong money supply growth.
  • While consumer spending remains sluggish in Japan, exports remain strong (helped by China) and the Japanese economy is at its strongest in 15 years, with robust profits & falling unit labour costs which are helping improve its competitiveness.
  • Growth in emerging markets remains very strong. Developing countries are doing well, with a steady move towards free markets, free trade, stronger domestic demand and easy money conditions as many central banks seek to limit appreciations in their currencies. Developing countries are growing around 6 to 7% per annum, and account for about 29% of world economic activity. While the OECD’s composite leading growth indicator for the G7 (basically Europe, Japan and North America) has slowed, reflecting the US, leading indicators for BRICs (Brazil, Russia, India and China) remain strong – in contrast to the past.

Within emerging markets, China continues to grow strongly and evidence suggests growth is becoming more sustainable with consumer spending playing a bigger role, business investment broadening out from the Eastern provinces and inflation remaining low. Continued strength in China explains, for example, why commodity prices, including the oil price, remain so high.

More general drivers of the recent de-synchronisation include the following:

1. The US downturn has been focused on the housing sector which isn’t very import intensive, so there hasn’t been a huge flow-on to exports from other countries.

2. The US housing downturn is a US specific problem unlike past growth shocks which were common across countries, for example, the 1970’s oil supply shocks or the bursting of the IT bubble.

3. The absence so far, of a generalised global slump in share markets, which is often a mechanism by which problems in the US are transmitted globally due to effects on capital flows and confidence.

4. A lack of inflation pressures has meant that the global economy has not had to contend with a rapid generalised increase in interest rates. This is evident in the next chart showing growth in global gross domestic product (GDP) against the change in global inflation (ie, whether inflation is rising or falling). Normally inflation follows a pick up in growth with a lag, which hasn’t really occurred in the latest cycle.

5. A reduction in the importance of trade flows with the US for some countries. While this is not the case for Latin America it certainly is in the case of Asia, as evident in the next chart.

What does it mean for investors?

  • Firstly, by smoothing the global business cycle, a de-synchronised global economy may help extend the bull market in shares, underway since March 2003. Slower US growth will enable the US Federal Reserve to cut interest rates, facilitating a positive liquidity backdrop for investment markets, while strong growth elsewhere will aid reasonable profit growth.
  • Secondly, it is likely to be accompanied by downwards pressure on the US$ as US growth slows relative to the rest of the world and US interest rates decline relative to global rates. The US$ is currently oversold with excessive short speculative positions in the currency suggesting that it has scope for a bounce, but the trend is likely to remain down. This in turn means the trend for the A$ is likely to remain up.
  • Thirdly, continued strong growth in emerging markets, particularly commodity intensive China, will ensure commodity prices stay strong. Ongoing demand for commodities provides a solid underpinning for Australian resource shares which also benefit from trading on conservative price-to-earnings multiples compared to the rest of the share market.
Can it be sustained? What to look for

The main risk to the de-synchronised global economic outlook is that if the US economy was to undergo a harder landing with the housing slump, it could lead to a sharp downturn in consumer spending and business investment. This would have a global impact as consumption and investment are import intensive. While unlikely, the US consumer is worth watching. Other risks worth noting are protectionist developments in the US, geo-political tensions and the oil price.


While the US economy has slowed sharply the rest of the world is on a solid footing, and providing the US downturn remains relatively mild, this is likely to remain the case. This provides a favourable back drop for share markets.

Dr Shane Oliver
Head of Investment Strategy and Chief Economist
AMP Capital Investors

[1] See “US mortgage problems – what’s the risk for the US economy?” Oliver’s Insights, March 2007 for a discussion of our views on the US economy.

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