>SIGNPOST (BARCLAYS CAPITAL)

ESSAY – STEADY AS SHE GOES

SO FAR, SO GOOD!
THIS YEAR IS TURNING OUT TO BE ONE IN WHICH THE GLOBAL ECONOMY (FIGURE 1) AND THE FINANCIAL MARKETS ARE MUCH BETTER BEHAVED THAN THEY WERE IN THE SECOND HALF OF LAST YEAR.

IN THE FOLLOWING PAGES, WE PROVIDE OUR NEW PROJECTIONS (SUMMARISED ON PAGE 5). READERS FAMILIAR WITH SIGNPOST WILL NOTICE THESE ARE ACTUALLY VERY SIMILAR TO THE FORECASTS WE PUBLISHED THREE MONTHS AGO, WHEN WE THOUGHT THAT A “THAW” HAD BEGUN. BUT WHAT HAS CHANGED IS OUR CONVICTION LEVEL REGARDING OUR FORECASTS: WE NOW HAVE RATHER MORE CONFIDENCE THAT REALITY WILL TURN OUT TO BE CLOSE TO OUR PROJECTIONS.

THAT IS NOT THE SAME THING AS SAYING THAT WE CANNOT REVERT TO THE SITUATION WE WERE IN LAST YEAR, WHEN THE APPROACHES THAT USUALLY DO A GOOD JOB AT PREDICTING ECONOMIC ACTIVITY BROKE DOWN, AND PSYCHOLOGICAL FORCES (OR “ANIMAL SPIRITS”) DOMINATED BEHAVIOUR. BUT, THAT RISK APPEARS TO BE FADING, IN MUCH THE SAME WAY THAT THE MEMORY OF A NIGHTMARE DOES SO WITH TIME.

POLICY EFFORTS PAY OFF
IN RECENT MONTHS, IT HAS BEEN CLEAR THAT COUNTRIES WHICH HAVE EXPERIENCED THE BIGGEST POLICY SHIFTS HAVE ENJOYED THE FASTEST AND LARGEST TURNAROUND IN THEIR FORTUNES. ¢ONSEQUENTLY, EMERGING MARKETS (ESPECIALLY IN ASIA) ARE GENERALLY MORE ADVANCED IN THE ECONOMIC CYCLE THAN THE “ADVANCED” ECONOMIES. ONE ILLUSTRATION OF THIS IS PROVIDED BY THE PURCHASING MANAGERS INDICES OR “PMIS” (FIGURE 2). THESE ARE MEASURES OF BUSINESS CONFIDENCE, BASED ON FIRMS’ REPORTS OF THEIR ORDER BOOKS, UNSOLD INVENTORIES, RECENT AND PLANNED PRODUCTION AND EMPLOYMENT AND OTHER FACTORS. FIHEN THE PMIS ARE ABOVE 50, THEN THERE ARE MORE FIRMS
EXPANDING THEIR BUSINESSES THAN CONTRACTING THEM. IF WE COMPARE THE PMIS IN BRAZIL, INDIA AND ¢HINA (BI¢) WITH THOSE IN THE US, EUROPE AND JAPAN, WE SEE THAT THE “BI¢S” HAVE ALL BOUNCED BACK INTO GROWTH-MODE AGAIN; BY CONTRAST, THE “ADVANCED” ECONOMIES ARE STILL FINDING THEIR FEET.

AMONG THE ADVANCED ECONOMIES, WE THOUGHT THAT THE US WOULD SUFFER LEAST, AND LEAD THE WAY IN RECOVERY, AGAIN BECAUSE OF THE SHEER SCALE OF THE US POLICY RESPONSE. AGAIN, THIS LOOKS TO BE THE RIGHT CONCLUSION.

To see full report: SIGNPOST