J.P. Morgan Sees Gradual Improvement in Global Economic Growth

J.P Morgan forecasts a gradual lift in global growth as global GDP looks to have expanded at a 2.8% annualised pace last quarter. 
 
"The global economy is tracking our call for a grinding acceleration back to trend growth this year," says J.P. Morgan in its Global Markets Outlook and Strategy (GMOS) report.
 
J.P. Morgan expects global economic activity to expand at a 3% annualised pace in the current quarter, 0.2% of a percentage point higher than the last GMOS projection. 
 
"Our top-down filtering of the aggregate data aligns well with the 2Q13 projection and, while it is early, is currently tracking a bit below our current-quarter outlook. Specifically, our global GDP nowcaster is pointing to a pace of growth of 2.9% in 2Q and 2.8% in 3Q."
 
According to the GMOS report, global retail sales volumes have accelerated to a strong 4.7% annual pace in the three months through June, allowing manufacturers to get leaner and setting the stage for a pickup in factory output. 
 
The July global manufacturing PMI survey reported a 1.7pt drop in the finished goods inventory reading, a message consistent with the significant slowing in the pace of stockbuilding for the limited set of countries reporting hard data on inventories.
 
"However, the positive message from last week’s manufacturing PMI is tempered by the still-depressed level of overall demand growth (inclusive of business equipment spending, which appears to have stalled in 1H) and continuedisappointments from Asia, a traditional leader in manufacturing cycles. While we expect global industry to pick up pace in 3Q, the lift will be limited unless we see a material acceleration in new orders, both in absolute terms and relative to inventory growth."
 
This week, the July global service sector PMI showed that the pace of activity growth in that sector lifted strongly at the start of the current quarter. 
 
Taken with the manufacturing output component, the all-industry PMI moved up to a level about in line with our forecast for 3.0% GDP growth in the current quarter.
 
One source of concern remains the divergence seen in the lift in momentum through 1H13 between the developed and emerging economies, an outcome echoed in the PMIs.
 
The EM PMI is pointing to a sharp deceleration in GDP growth that raises sizable downside risk to the J.P. Morgan projection for the region. 
 
The July decline marks the fourth consecutive drop in the EM all-industry PMI, with the current level the lowest since April 2009. However, while soft domestic demand will weigh on the EM in the coming quarters, the improvements underway in the developed markets will provide a welcome lift to the global tide that will raise all boats, albeit to varying degrees.
 
Emerging Asia lags as regional demand sags
While risk of corporate retrenchment is modest in the US, Emerging Asia poses a greater threat. 
 
"Usually EM Asia production and trade data are at the leading edge of turns in global growth momentum," says the report. "However, as evidence of lift in US and European industrial sectors accumulates, the news from EM Asia remains disappointing."
 
In addition to the sluggish PMIs, export performance is soft and industrial production is not showing clear signs of recovery.
 
J.P. Morgan believes there are two related factors behind EM Asian softness. First, global final demand growth has not yet gathered a good head of steam as better news in the developed markets is likely being offset by disappointment in EM economies. Second, regional domestic demand growth is soft as credit conditions have tightened and employment growth is slowing. 
 
As a result, EM Asia may be in the unusual position of laggard to a pickup in global growth. The regional manufacturing PMIs were down nearly across the board in July, with declines in China, Korea, Taiwan, India, and Indonesia.
 
"China is at the center of this dynamic and we expect Friday’s July data releases to emphasise that growth remains stuck close to the 7% floor—the lower limit

policymakers will accept."  

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