The global economy is facing two scenarios in the near future. A race, you might say, and the question is, which scenario will win?
The first scenario is inflation declines, which would allow central banks to stop raising interest rates.
The second scenario is a recession where high inflation and interest rates cause consumers to spend less, which in turn affects business growth.
Which scenario “wins” is crucial for markets.
PMI data – a key insight
Monthly ‘PMI’ (Purchasing Managers Index) data provide key insights. PMI indices are available for over 40 countries and industries and derived from business condition surveys of senior company executives. They give insight into the outlook for GDP, inflation, exports, inventories, and employment. A level over 50 indicates expansion, while a level below 50 indicates contraction. In short, monthly PMI data is a timely health check for the global economy.
Recession risks are high
Currently, PMIs show rising recession risk. US, EU, Japan, and Australia composite PMIs are all now below the borderline 50. The UK is on the verge of slipping under, with only China well above. But even in China, recent economic data was weak and authorities were forced to cut interest rates. More companies are citing recession risks. Analysts are cutting profits growth forecasts.
However, the data can be confusing.
For example, the US PMI says the recession has arrived, but the Fed Q3 GDPNow cast shows a rebound.
Inflation pressures are easing
Factors that have driven up prices seem to have peaked, according to PMIs. There are fewer supply chain problems, shorter delivery times and output price increases have eased. We are still seeing uncomfortably high PMI levels, but they are falling. This implies that the easing in US inflation that we are seeing appears to be on solid ground.
Jobs markets are strong
Jobs markets remain strong for now, and this is giving central banks time to deal with inflation without causing a recession. The resilience of job markets, i.e., low unemployment rates, will determine the depth and length of any economic downturn.
We are seeing data indicating both the potential for inflation to decline and the potential for a recession in the near future. The question is which scenario will play out.