Global Business Cycle in Transition: Kemp – Reuters

By John Kemp

Global economic activity in the third quarter of 2023 showed a mixed picture, with notable improvements in the United States and China contrasted with ongoing sluggishness in other regions.

According to estimates from the Netherlands Bureau for Economic Policy Analysis, global industrial production saw a modest increase of 0.4% in August 2023 compared to the same month the previous year. However, trade volumes decreased by 3.8% in August year-over-year, reflecting a stagnation consistent with recessionary indicators.

The United States and China, being the largest economies globally, demonstrated signs of a modest acceleration in growth during the third quarter after a significant slowdown in the first half of 2023. Preliminary estimates indicate that U.S. real gross domestic product (GDP) rose at an annualized rate of 4.9% from July to September, up from 2.1% in the previous quarter. The increase was mainly driven by a rise in consumer spending, particularly on services.

While service sector activity appeared to improve, manufacturing continued to decline, though it showed signs of nearing a cyclical low, suggesting potential recovery ahead. Unemployment claims have been trending lower since early July, indicating a strengthening labor market.

Service sector prices experienced an annualized growth rate of 5.2% in the third quarter, compared to 3.3% in the second quarter. However, some indicators suggest that the current strength might not be sustainable. A significant portion of the GDP growth in the third quarter was attributed to business inventories, which typically reverse within a few months, indicating potential challenges in the fourth quarter.

Real final sales to private domestic purchasers, a measure that excludes volatile changes in inventories and government spending, increased at an annualized rate of 3.3% in the same period, reflecting a return to moderate growth after a brief slowdown.

Concerns persist regarding the sustainability of this recovery due to limited spare capacity in the labor market and energy supplies, alongside a low unemployment rate of 3.8% in September. Additionally, inventories of diesel and distillate fuel oils were significantly below the recent historical average.

In China, the economy also appears to have rebounded in the third quarter after a slump. The manufacturing purchasing managers index showed consistent improvement, while container traffic at coastal ports increased significantly. Furthermore, electricity generation rose by 9%, with notable growth across various sectors.

China’s recovery is positively impacting neighboring economies. However, Japan remains challenged, particularly with air cargo volumes significantly down, and South Korea’s equity index has weakened in tandem with declines in global trade volumes. Global container shipping rates indicate soft demand, further reflecting the overall sluggishness.

Europe continues to experience challenges, grappling with high energy prices and trade disruptions resulting from geopolitical tensions, alongside ongoing inflation and rising interest rates. Euro zone manufacturers reported a continuous decline in business activity, with significant struggles in energy-intensive sectors.

As uncertainty looms over the economic outlook, the improving conditions in the U.S. and China might signal a potential resumption of economic expansion in 2024, following a slowdown in late 2022 and early 2023. Nevertheless, growth appears to be skewed towards services rather than goods, potentially hindering international trade flows. Persistent inflation, especially in the service sector, along with constrained industrial capacity, raises concerns about a resurgence of merchandise inflation.

Market analysts suggest that to prevent renewed price pressures, the U.S. central bank may need to maintain higher interest rates for an extended period. Yields on government securities have been rising, impacting borrowing costs for businesses and households, leading to a reduction in capital expenditure.

Overall, the economic landscape remains tenuous, with mixed signals from various sectors and regions, raising questions about the robustness and longevity of the current recovery phase.