In 2014, most global forecasting agencies think the global economy will have a decent year, pushing up Australian economic growth.
But if things change, how will you know?
AMP economist Shane Oliver has released a list of five economic indicators he’ll be watching to see how the global economy is doing. He talked SmartCompany through why they’re each very important.
1. Global PMI indicators
PMI stands for ‘purchasing managers index’. It’s a measure of the manufacturing sector. Most countries have one, and they’re some of the most watched global statistics by markets and economists.
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PMIs take into account five major things: inventory levels, new orders, production levels, supplier deliveries, and employment. A PMI of over 50 represents an expanding manufacturing sector – below 50 indicates the opposite.
“The reason it’s worth watching PMIs is that they come out monthly, at the end of the month usually, and relate to the month just gone,” Oliver tells SmartCompany. That makes them unique among most economic indicators, which come out months after the period they refer to.
In Australia, we have the Australian Industry Group Performance of Manufacturing PMI, which was 47.6 in December.
“Globally, PMI indicators have been heading in the right direction after falling through 2012,” Oliver says. “And that’s consistent with global growth picking up.”
2. US wage growth
“The US sharemarket has a huge impact on global markets,” Oliver says. “And that’s the case with our market too.
“At the moment, the share market is up, but unemployment is still high. What that’s meant is that the US central bank has continued to pump money into the economy. If US wages or jobs growth pick up, they might ease back that stimulus.
“If US wage growth picks up, it could be a sign that the Federal Reserve is about to tighten.”
This is counterintuitive. Surely a healthy American labour force would be good for global economic growth. Oliver says this might be the case, but in the short term, a reduction in stimulus would be the “sting in the tail” of improving conditions.
3. The spread to German bond yields of Italian and Spanish bonds
Spread merely refers to the difference in interest rates offered on different government bonds.
Germany is regarded as the most stable country in the euro zone, while Italy and Spain are regarded as dicier prospects for investors. If investors begin getting nervous about those countries, they’ll demand higher interest rates to buy government bonds.
“Through the euro zone crisis, bond yields in Italy and Spain rose dramatically relative to German bonds,” Oliver said. “As the crisis settled down, that spread has narrowed. And so far, it’s still heading in the right direction. We want to see that continue. If the spread widens out again, it suggests investors are getting nervous.”
4. Chinese lending and money supply growth – it should trend sideways
For most of the world, growth in the Chinese economy is a good thing. Any fall in this growth is a bad thing. But for Chinese authorities, fast growth leads to inflation, and so if the economy grows too quickly, they might clamp down on interest rates and spending to cool things down.
That’s why, Oliver says, we shouldn’t be calling for rapid change in either the amount of lending going on in China (a sign of rising investor sentiment) or in money-supply growth.
“If those two indicators trend up, growth could go back to 10% a year. If they slow down, the economy might surprise on the downside.
“Some would say if it goes up it’d be a return to the mining boom. But Chinese authorities have probably had enough of 10% growth.”
5. Australian consumer confidence and retail sales
Interest rates are at record lows, and this has clearly boosted the property market, Oliver says.
“But we need to see growth elsewhere in the economy. We want to see the housing recovery flow through to stronger consumer spending.
“So we’ll be watching key indicators of consumer confidence and retail sales. They’ve moved in the right direction lately – they’re stronger than they were a year or so ago – but there’s still lots of room for improvement.”