Friday, 15 May 2015

A Crucial Component of Advanced Economies Is Looking Up

In World Economy News 15/05/2015

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Bi-monthly updates on the state of the manufacturing sector around the globe tend to get all the attention, while readings on the services sector are downplayed.
This is warranted to some extent: purchasing managers’ indexes for the manufacturing sector have proven to be a reliable leading indicator for economic growth.
However, services play a major role in the world’s developed economies.
And on that front, things are looking up.

Barclays economist Tal Shapsa and analyst Christian Keller observe that the firm’s global services sector confidence index appears to have decoupled from its manufacturing counterpart recently:
Surprisingly, Barclays’ global manufacturing confidence index slid to a two-year low in March despite the collapse in oil prices, a key input cost for some firms in the space.
What’s more, this divergence has occurred wholly thanks to a pick-up in confidence in developed markets. Barclays’ emerging markets confidence index has been trending downwards since 2010, though the gap has become much more pronounced over the past two years:

Shapsa and Keller loosely attribute the relative strength in advanced economies to monetary stimulus provided by central banks in those nations effectively feeding through to the real economy.
“Although monetary easing may not help much in addressing the drivers of the global slump in manufacturing and trade – China’s slowdown, global production overcapacities, intense competition in the traded goods sector etc. – it may be more effective in supporting the more domestic consumption-oriented service sector,” they wrote.
Since 2010, the services sector has tended to lead manufacturing, Barclays found.
The duo theorizes on the implications of that:
Clearly, this alone may provide limited confidence for global growth prospects in coming quarters. However, some tentative takeaways could be: 1) as policies have reached extremes and economies are undergoing (not yet fully understood) fundamental changes globally, the relationships between global cyclical indicators are changing as well; 2) loose financial conditions may support the less-constrained services sectors in advanced economies more than manufacturing industries; 3) this could turn the services sector into the new leading indicator; 4) if true, the robust reading in service sector confidence could bode well for an improvement in manufacturing confidence in the coming months.

Source: Bloomberg