Stimulus working?

There was a broad-based improvement in global business sentiment in February . The developed market (DM) composite sentiment index increased from 53.5 to 54.6, which was 1.1 points higher than a year ago and 1.6 points higher than its average over the past three years. As has been the case for some time, sentiment is highest in the United States and United Kingdom, which is translating into steady improvement in their labour markets. Indeed, the trend in US employment growth reached a new post-crisis high in February, which should be enough to elicit a change in the Fed’s forward guidance at its meeting next week. Most of the improvement in DM business sentiment is coming from the service sector, as manufacturing activity continues to be weighed down by the structural slowing in global trade growth. Services sentiment in the Eurozone has now paired almost all of its losses from the second half of last year, led somewhat surprisingly by France. This, together with confidence in its own policies, underpinned the upgrade to the ECB’s growth forecasts last week. Meanwhile, business sentiment in Japan lost momentum in February, perhaps due to disappointment that the BoJ has not loosened policy again.

Encouragingly, emerging market (EM) business sentiment also improved last month. In line with the DM economies, services led the way, rising by 1.1 points, although it remains low by the standards of previous years. The biggest improvements in services sentiment took place in India and Brazil. The strengthening in India was understandable given the cyclical recovery underway, supported by falling inflation and looser monetary policy. Brazil’s improvement was harder to fathom, and therefore less likely to last, given that the opposite forces are at play. Chinese sentiment also improved as the government continued to loosen fiscal and monetary policy settings, although the weakness of the most recent import numbers point to ongoing weakness in domestic demand. Meanwhile, Russian sentiment hit a new multi-year low in February, as domestic economic conditions continue to deteriorate, reinforcing our expectation that the economy will contract significantly this year.