Should Financial Markets Be Worried About Global Economic Growth?
Should Financial Markets Be Worried About Global Economic Growth?
By:Ilya Spivak
Do financial markets need to worry about where the global economy is going?
- The global economy picked up speed in November, say S&P Global and JPMorgan
- A sudden misstep on ISM services PMI data flags wide global growth imbalances
- If the U.S. economy slows, a worldwide downturn may fuel broad credit crisis risk
Global economic activity grew for the 14th consecutive month in November. Moreover, the pace of expansion quickened for a second consecutive month, albeit modestly. It came in at the fastest since August. Those were the cheery headlines world-spanning purchasing managers index (PMI) data from S&P Global and JPMorgan today.
The report credited the service sector with driving performance yet again while manufacturing limped along at a lackluster pace, repeating a familiar narrative from the past two years. Strength in the U.S., India and Ireland was highlighted. Not surprisingly, weakness was concentrated in the major Eurozone economies: Germany, France and Italy.
U.S. service sector data: A warning sign for the global economy?
A separate report on the U.S. service sector from the Institute of Supply Management (ISM) offered a more circumspect view. It showed that the pace of activity growth unexpectedly cooled to the weakest in three months in November. The report flagged slower growth in new orders and employment, even as prices kept expanding briskly.
This is a worrying disconnect. Global economic growth is powered by three key engines – the U.S., the Eurozone and China. Together, they accounted for 58% of the world’s aggregate gross domestic product in 2023, according to the World Bank. Moreover, the remaining 42% are often vendors dependent on the “big 3” for external demand.
A vast divergence in performance for the leading engines has emerged since April of this year. The U.S. veered upward in the second half of the year, while a tepid recover in the Eurozone has fizzled and recession-like conditions have returned. China is growing, but only at snail’s pace, having failed to generate lasting liftoff for over a year.
Should markets worry about global growth imbalances?
On balance, this makes the U.S. appear even more indispensable than usual global whole. A misstep for the North American behemoth would be catastrophic for the rest of the world, with a worldwide recession almost certainly to follow. That makes the steep drop in the ISM service-sector gauge a troubling omen.
For the financial markets, the most immediate risk comes from the implications of any global slowdown on debt servicing costs. The Institute of International Finance (IIF) reported this week that the global debt pile surged to a record $323 trillion in the first three quarters of this year.
Despite the eyewatering debt load, the IIF put the global debt-to-GDP ratio at a four-year low. If U.S. growth were to hit a roadblock, this ratio is likely to rise even as borrowers contend with towering refinancing obligations in 2025 and 2026. A fast-acting credit crunch that rattles financial markets is easy to envision under such circumstances.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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