Whisper it not to your friends in financial markets, but the global economy is moving into recession.
The US stock markets keep making new highs, thanks to the support from the major western central banks. But in the real world, where the rest of us live, the best leading indicator for the global economy is clearly flashing a red light:
- On the left is Prof Robert Shiller’s CAPE Index, showing the US S&P 500’s valuation is at levels only seen before in 1929 and 2000
- On the right is the American Chemistry Council’s global chemical Capacity Utilisation (CU%), which has fallen back to May 2013’s level
They can’t both be right about the outlook.
Chemicals are known to be the best leading indicator for the global economy. Their applications cover virtually all sectors of the economy, from plastics, energy and agriculture to pharmaceuticals, detergents and textiles. And every country in the world uses relatively large volumes of chemicals.
The chart shows the very high correlation with IMF GDP data. Even more usefully, the data is never more than a few weeks old. So we can see what is happening in almost real time.
And the news is not good. The CU% has been in decline since January 2018, and it is showing no sign of recovery. In fact, our own ‘flash report’ on the economy, The pH Report’s Volume Proxy Index, is showing a very weak performance as the charts confirm:
- The Index focuses on the past 6 months, and shows a very weak performance. It has gone negative even though September – November should be seasonally strong months, as businesses ramp up their activity again after the holidays
- Even more worrying is that the main Regions are currently in a synchronised slowdown. And each time they have tried to rally, they have fallen back again – a sign of weak underlying demand
And, of course, we are now moving into the seasonally slower part of the year, when companies often destock for year-end inventory management reasons. So it is unlikely that we will see a recovery in the rest of 2019, whether or not a US-China trade deal is signed.
The problem is very simple:
- In the past, central banks saw their role as being “to take away the punch bowl just as the party gets going”. They focused on examining a range of economic indicators, and rejected the idea that a single indicator could be a guide to policy
- Today, they believe that “higher stock prices will boost consumer wealth and help increase confidence“. They focus on printing more cash whenever stock markets start to weaken, and then congratulate themselves on a job well done
They see no need to focus on understanding major challenges such as the potential impact of ageing populations on economic growth, the retreat from globalisation and the rise of protectionism, or the increasing importance of sustainability.
Perhaps they are right. But the evidence from the CU% on developments in the real world suggests a wake-up call is just around the corner.