quarterly update

Disappointing jobs data from the U.S., weak commodity prices, and another downbeat set of manufacturing surveys have fueled fears that global growth is collapsing. However, we continue to think these worries are overdone and believe the current growth scare should give way to a resumption of the global economic expansion over time. The core of our view is that Chinese growth and perceptions should soon stabilize, while the euro area economy will likely continue to slowly recover, and the U.S. expansion should remain on track, or firm moderately.

The recent turbulence in financial markets has highlighted how vulnerable global investor sentiment is to developments in China, but the risks to the world economy are smaller than many assume. Undoubtedly, China is facing major challenges and the headwinds to its manufacturing sector are not expected to go away anytime soon. Still, underlying data has been more positive than headlines suggest, with large parts of the Chinese economy, such as the services and consumer sectors, remaining strong. Policymakers in China also have the luxury of still being able to loosen policy if necessary.

In fact, the shift to slower but more sustainable growth in China, particularly if it is less dependent on commodity-intensive investment and on exports, could leave the rest of the world better off. Certainly, the adjustment phase would hurt commodity producers. But, while we believe there will be some big losers, an extended period of lower commodity prices should be a net positive for the global economy, including plenty of developing countries, such as China and India. 

More broadly, as the engine of global growth continues to shift away from emerging markets, data from other major economies has been generally positive and there is very little to support fears of a major global downturn. Both the U.S. and the euro area economies are stronger and more durable than investors currently acknowledge and will likely improve further in the months ahead. This should provide significant support to the global economy, given that collectively the U.S. and the Eurozone total nearly 40% of global GDP. More importantly, they account for an even larger proportion of global final demand, which is most critical in terms of driving global growth.

In the U.S., the recent slowdown in employment growth will probably delay the first interest rate hike until early 2016, but it does not appear to be the start of a sustained deterioration in labor market conditions. The pace of employment growth has undoubtedly slowed since the six-month average gain reached almost 300,000 late last year. Over the past six months, the average gain has been closer to 200,000, but the economy could never be expected to sustain such an elevated pace of job growth. The average monthly gain since 1950 is only 125,000, and prolonged periods of average gains exceeding even 200,000 are not common.

If there had been a genuine deterioration in labor market conditions, we would expect to see a rise in initial jobless claims. However, claims remain unusually low, at well below 300,000. The problem is not on the hiring side either. Among other indicators, the job openings rate is at a record high and the recent Conference Board survey shows an increasing number of house-holds stating that jobs are plentiful. While certain sectors like manufacturing and mining are indeed struggling, and job losses are mounting, this indicates that the slowdown in total employment growth is more a problem of tight labor supply than it is weak labor demand.

Likewise, problems in the energy sector or weak exports should not derail the overall economy, although they will likely restrain the pace of its growth. The dollar’s strength is weighing heavily on U.S. trade, with real exports trending down in recent months while real imports are surging. However, the increase in imports largely reflects the strength of domestic demand (particularly in the household sector) rather than the stronger dollar. Ultimately, the U.S. consumer remains the key driver of the economy and most indicators signal continued solid growth. As long as payrolls expand at a decent pace, the expansion is expected to be on stable footing.

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