In recent weeks , fears of economic weakness have resurfaced as a bout of risk aversion has swept across global markets.
Economic data surprise indices have turned decisively lower , indicating that economic data are now coming in below consensus forecasts.
"It is hard to avoid the reality that the overall macro data picture is bleaker now than a few months ago ," says Aleksandar Timcenko , a vice president on the global macro strategy team at Goldman Sachs.
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How individual components of Goldman's proprietary "Global Leading Indicator" index changed in January.
In a note to clients , Timcenko examines the recent underlying data that go into Goldman's proprietary "Global Leading Indicator" index , a measure used as a proxy for global growth.
"Our Global Leading Indicator now suggests that the period of accelerated growth ended in September of 2013 ," he writes.
"The ensuing four months of 'Slowdown' — positive but sequentially declining global growth — reduced the monthly rate of growth to a half , from around 0.40% per month to 0.20% per month."
Timcenko walks through how it all unfolded in recent months:
The first time the GLI pointed to Slowdown was in the Advance November 2013 print , released in mid-December. At that point , the weakness was concentrated in EM-exposed components , including Korean exports , and the industrial metals price index. Also , Global PMIs — while still improving — were quite sharply split between improving DMs and weakening EMs. And at that time , our interpretation was that the weakness was localised.
But now , with the January reading , which we released earlier in the week , the weakness seems to be broader. Six components declined: the Baltic Dry index , global new orders-to-inventories spread , global PMIs , the AUD and CAD trade-weighted index , Korean exports and the Japanese inventory/sales ratio. Four components improved: the Belgian and Netherlands manufacturing surveys , consumer confidence aggregate , S&P GSCI industrial metals index® , and U.S. initial jobless claims.
Although the large decline in the U.S. PMI , and the U.S. new orders-to-inventories spread in particular , was quite extreme , before entering the index , like all data , it undergoes a battery of statistical transformations — de-trending , filtering and standardising. And when looking at the components of the GLI , our read of the evidence suggests that the ongoing GLI Slowdown — which we now date to have started in November — is still mild , but spread broadly across components.
Relative to the start of the Slowdown phase , the global new orders-to-inventories spread is about flat , and global PMIs fell only by a small amount relative to their historical volatility. Over the last month , the declines here have become more pronounced: the global new orders-to-inventories spread fell by about one standard deviation and global PMIs fell about half a standard deviation , hardly dramatic declines. Korean exports and the Japan inventory-to-sales ratio both fell modestly too , also by around half of their respective standard deviations.
A component that fell particularly sharply over last three months is the AUD/CAD trade-weighted index. On a three-month horizon , the index fell by more than two standard deviations. It continued to retreat last month , although at a somewhat moderated pace.
Offsetting the widespread weakness , the global consumer confidence aggregate was particularly strong , increasing at times by more than a standard deviation on a monthly basis.
Overall , the cross-sectional dispersion of GLI component moves is close to its historical averages , suggesting that there are no 'outliers' that have skewed the final print in their own direction , and that the most recent weakness , while not unusual and still not alarming , is likely a fair reflection of the current macro landscape.
It wasn't until mid-January that global risk markets — most notably , the S&P 500 — began to take notice and adjust accordingly to the first part of the slowdown.
While Goldman and most other shops across the Street don't expect the slowdown to persist , the worry is that recent volatility in financial markets could feed back into the real economy , and the slowdown could enter a new phase.
"If — against our expectations — this market turbulence persists for several more weeks , there will naturally be some ripple effects ," says Andrew Cates , an economist at UBS.
"Global financial instability will inevitably lead to economic instability via channels concerning balance sheets , risk premiums , the cost of capital , confidence , spending and trade. Simulation analysis for the record suggests that if the recent EM-induced turmoil does not reverse itself — but equally does not extend itself — global industrial production growth would be around 0.1-0.2 percentage points lower than otherwise in the year ahead."
Read more: http://www.businessinsider.com/goldman-on-the-spreading-global-slowdown-2014-2#ixzz2srXDJnI5