LONDON (Reuters) – Global economic activity was mixed in the third quarter of 2023, with clear signs of improvement in the United States and China but continued weakness elsewhere.
According to estimates compiled by the Netherlands Bureau for Economic Policy Analysis (CPB), global industrial production rose just 0.4% in August 2023 compared to the same month last year.
But trade volumes fell 3.8% year-on-year in August and have not grown in a year, a sign of stagnation consistent with an economic recession (“World Trade Monitor,” CPB, October 25).
The world's two largest economies, the United States and China, showed signs of slightly faster growth in the third quarter after a notable slowdown in the first half of 2023.
Preliminary estimates show that U.S. real gross domestic product grew at an annual rate of 4.9% in the three months from July to September, up from 2.1% in the three months from April to June.
The largest contribution came from increased consumer spending (+2.7 percentage points), especially services (+1.6 percentage points), with a smaller contribution from goods (+1.1 percentage points).
The acceleration is consistent with Purchasing Managers' Survey data showing services sector activity increased in the third quarter after slowing slightly in the second quarter.
Manufacturing activity continues to decline, but there are clear signs that it is nearing the bottom of the business cycle and that an expansion is imminent.
Initial claims for unemployment insurance rose through the first six months of the year but have been declining since the beginning of July.
Services sector prices rose at an annualized rate of 5.2 percent in the three months to September, up from 3.3 percent in the three months to June.
But there were warning signs that some of the strength may be temporary and not sustained in the coming quarters.
The second largest contributor to real gross domestic product (GDP) growth in the third quarter was business inventories (1.3 percentage points).
The contribution from inventory changes typically reverses within three to six months, so a tailwind in Q3 could turn into a headwind in Q4.
Real final sales to domestic private buyers (FSPDP), a measure that strips out changes in inventories, trade and government spending, rose at an annualized rate of 3.3 percent in July-September.
Real final sales increased at an annualized rate of 1.7% in April-June 2022, accelerating sharply from a -0.2% decline in October-December.
The final sales confirm that the economy is returning to modest growth after the shortest and shallowest cyclical slowdown in late 2022 and early 2023.
But the sustainability of the current economic recovery remains a question: There is not enough room in the labor market or energy supplies to support new growth without sparking inflation.
The unemployment rate was just 3.8% in September, while inventories of diesel and other distillate fuel oils were 19 million barrels (-15%, -1.29 standard deviations) lower than the seasonal average over the past 10 years.
China and Asia
China's economy also appears to have returned to growth in the third quarter after a decline in the second quarter.
The manufacturing purchasing managers' index improved for the fourth consecutive month, rising from just the 2nd percentile in May to the 38th percentile for any month since 2011 in September.
The volume of containers handled at China's coastal ports rose about 8 percent in September from the same month a year earlier, according to transport ministry data.
China's electricity production in September increased 9% compared to the same month last year, with significant increases in electricity consumption by service sector companies (17%), manufacturing (9%) and primary industries (9%).
China's recovery is helping lift other regional economies.
Singapore serves as a major transhipment hub for trade between Asia and Europe, and cargo volumes are showing signs of growth.
The port has handled record volumes of seaborne containers over the past 12 months, with volumes up more than 4 percent in September compared to a year ago.
However, air cargo volume remains sluggish in Japan, with cargo volume at Narita International Airport down 23% year-on-year and showing no signs of recovery.
South Korea's KOSPI 100 stock index, usually seen as a good indicator of global trade due to its high proportion of export-oriented companies, recovered strongly towards the end of July.
However, the index has since weakened, coinciding with a new decline in the volumes shown in the World Trade Index.
Global container shipping rates fell again in September and October after rising over the summer, a new sign of weak demand.
Europe
Europe remains the weakest region, struggling with the combined effects of rising energy prices, disruptions to trade flows following Russia's aggression in Ukraine, and persistently rising inflation and interest rates.
Eurozone manufacturers reported their 16th consecutive month of decline in business activity in October, with the Purchasing Managers' Index remaining in the fifth percentile for all months since 2007.
In Germany, energy-intensive manufacturers reported that production was still down 16% in August 2023 compared with January 2022, before the Russian invasion, with no signs of recovery.
Uncertainty
Uncertainty and ambiguous data about the economic outlook are typically greatest near turning points in the business cycle.
As the United States and China are the two engines of the global economy, accelerating growth in both countries could portend a resumption of expansion in 2024 after a slowdown in late 2022 and early 2023.
However, growth will still be biased towards services rather than goods, which will act as a drag on international trade flows.
Of further concern is the persistence of inflation in the services sector, while limited industrial spare capacity and raw material inventories could lead to a relatively rapid resurgence of commodity inflation.
Most interest rate traders expect the U.S. central bank will need to keep overnight rates higher for longer to prevent a resurgence of price pressures in 2024.
Yields on long-term government bonds, the benchmark for corporate and household borrowers, are rising.
Yields on 10-year Treasury notes are currently trading at around 4.9%, up from just 3.5% at the end of April and the highest level in 16 years.
The longer interest rates remain high, the greater the share of loans that will be reset to higher levels and the greater the impact on business investment and household spending.
In the United States, rising borrowing costs and an uncertain economic outlook are already hurting business investment in new equipment.
New orders for non-defense capital equipment excluding aircraft, a proxy for business equipment spending, showed virtually no growth in nominal terms over the past 12 months.
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John Kemp is a Reuters market analyst. Opinions expressed are his own.
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