Greasing the wheels of consumers

Our economic story for 2015 is simple: low interest rates, the halving of oil prices, healthier private sector balance sheets, improving labour markets and reduced fiscal drag should lead to a meaningful improvement in the global economy after three years of below-trend growth. That said, we also expect stronger growth to come with significant divergences, depending on whether countries are net commodity importers or exporters, the tightness of domestic financial conditions and the extent of the structural headwinds weighing on growth.

The best evidence that our forecasts are on track is coming from consumer spending data; retail sales have picked up solidly over the past two months in the US, UK and Eurozone, while in China, spending has thus far been immune to the downward trend in property investment and industrial activity. Indeed, JP Morgan has calculated that global retail sales volumes are on track to grow at an annualised rate of 6% in Q4 2014, which would be the fastest growth since 2010.

Although the buoyancy of consumer spending in the developed economies is yet to translate into firmer global trade and industrial production growth, it should only be a matter of time. Less supportive are the trends in business sentiment and investment.

The global manufacturing and services sector PMIs have both fallen away noticeably in recent months and were at their lowest level since late 2013 in December (see Chart 1). Business sentiment has deteriorated markedly in the US, UK, Eurozone, Japan, Russia and Brazil, with India the only large economy trending in a positive direction.This weakness in business sentiment is reflected in a number of investment indicators. US core durable goods orders and shipments have levelled off in recent months, after growing strongly through Q2 and Q3. Meanwhile, collapsing commodity prices are forcing oil and mining companies to cut their capex aggressively after years of strong growth. Our expectation is that the robust tailwinds for global consumer spending will win out and more than offset any decline in global oil and mining investment in 2015. We cannot take this for granted though, and will continue to monitor the trends in the hard data for signs that PMIs are the indicator giving us the more reliable steer.