How Worried Should You Be About Global Growth? Very

According to none other than the very smart people at Goldman Sachs, that is precisely the answer

As a recap, we sounded the alarm bells last week with a single picture as we flew into Singapore - close to a hundred commercial ships docked off the coast in purest sign very weak trade activity.


Global Trade Volumes Paint Gloom

Trade, as most starry eyed economists will concur, remains one of the most crucial economic activities despite an increasing portion of the globalized economy becoming more service-driven. Global trade volumes aren't looking good at all.

To provide more color on how the global trade scene currently is, we turn to Søren Skou, Chief Executive of Maersk, the world's largest container shipping line. He wasn't all that optimistic as readers should be able to tell. When the head of the largest shipping conglomerate in the world warns of trouble ahead, take heed

From the FT:

Container demand rose by about 4% in both 2013 and 2014 and Maersk Line, the Danish group that ships about 15% of the world’s seaborne freight, expects it to increase 3 to 5% this year.

I’m personally more towards the low end of that,” Søren Skou, Maersk Line’s chief executive, told the Financial Times. “Growth from a historical perspective is quite sluggish. It has a huge impact for us as an industry.”

Furthermore, in the ongoing debate whether the collapse in crude prices is due to excess supply or a global contraction, this is what the world’s biggest shipper thinks: Mr Skou called the halving of oil prices in the past year “a net positive for container growth” but nonetheless said the opposing forces were potentially greater.

“The economies in Europe are still very sluggish. Brazil, Russia and China: those three economies used to drive a lot of growth, and right now we are not really seeing that to the same extent. The only real bright spot is the US, and even the US is good but not great,” he added.

He said that it was always hard to interpret the first quarter because of the Chinese new year but added: “To my mind volumes were sluggish. There is nothing in container volume numbers that suggest that the global economy is just on the verge of starting a new growth trend.”

“Before if you acquired too much capacity you could kind of work your way out of it. In a 4 per cent environment capacity decisions take on a different perspective if you get it wrong. The good old days aren’t coming back,” he added.

Despite the warning, Maersk is about to order new ships for the first time since 2011 when it bought 20 Triple Es, then the world’s largest vessels capable of transporting the equivalent of 18,000 20-foot containers.

Mr Skou said a decision would be made between April and June with the likelihood that more Triple Es would be ordered, possibly slightly modified to take up to 20,000 containers. Maersk has said it needs the new ships to help it maintain its market leadership up until the end of the decade.
— The Financial Times

Goldman Says Global Economy In Contraction

When in doubt, ask the Vampire Squid, or so they say. Goldman's economics team has some pretty fancy leading indicators that have proven to be rather accurate in foretelling the trajectories of economic trends. So there is some logic in turning to the world's most profitable investment bank to determine how worried we should actually be when we look at global growth today.

Goldman has something which it calls the Global Leading Indicator (GLI). What exactly is that? From the horse's mouth: 

The Global Leading Indicator (GLI) is a Goldman Sachs proprietary indicator that is meant to provide an early signal of the global industrial cycle on a monthly basis. There is an Advanced reading for each month, released mid-month, followed by the Final reading, released on the first business day of the following month.
— Goldman Sachs

Now that we know what the GLI is, it's time to read into what it has been telling us for quite some time. For the detailed explanation, refer to the GLI "Swirlogram" chart below; the "Swirlogram" is essentially a visual plot of the GLI readings on 2-axis scale - GLI growth & GLI acceleration. But in short, the indicator suggests that the global economy has started to contract, and has been doing so for the last 3 months.

Goldman's GLI "Swirlogram": The final print for February's GLI reading affirms the global economy has entered a contraction with accelerating negative growth. It also shows that the global economy has been in the contraction phase for the last 3 months (December, January, February). What is just as worrying is that just six months after being in expansion territory, the indicator has collapsed into contraction with monthly revisions notably deep - 9 out of 10 components declining in February.

Goldman's GLI "Swirlogram": The final print for February's GLI reading affirms the global economy has entered a contraction with accelerating negative growth. It also shows that the global economy has been in the contraction phase for the last 3 months (December, January, February). What is just as worrying is that just six months after being in expansion territory, the indicator has collapsed into contraction with monthly revisions notably deep - 9 out of 10 components declining in February.

This inference might not be fully reflected in mainstream economic indicators, but if past is prologue, Goldman's economics team is warning that the world is in for a slowdown in growth.

GLI momentum turns negative for the first time since 2011. Although we agree that this is too tiny a blip to read into, if we continue to see follow through deeper into negative momentum, this might spell bad news for growth in global industrial production  

GLI momentum turns negative for the first time since 2011. Although we agree that this is too tiny a blip to read into, if we continue to see follow through deeper into negative momentum, this might spell bad news for growth in global industrial production  

This chart courtesy of Zero Hedge depicts just how much US macro data has really disappointed - as bad is it has been compared to 2012

This chart courtesy of Zero Hedge depicts just how much US macro data has really disappointed - as bad is it has been compared to 2012

Apart from Goldman's implicit warning - perhaps as goodwill to reward the hand that has fed it so sumptuously since the depths of the financial crisis in 2008, a quick look at how US Macro data has fallen at its fastest pace in 3 years and is at its weakest level since July 2011 even as 42 of 48 data items have missed since the start of February. Please tell us now, how is the world's largest economy and the strongest spluttering engine of marginal growth looking good? It isn't.

Below is the list of US economic data sets that have missed and beat expectations respectively. The miss-beat tally for February stands quite depressingly at 42-6:

Missed expectations (42)
  1. Personal Spending
  2. Construction Spending
  3. ISM New York
  4. Factory Orders
  5. Ward's Domestic Vehicle Sales
  6. ADP Employment
  7. Challenger Job Cuts
  8. Initial Jobless Claims
  9. Nonfarm Productivity
  10. Trade Balance
  11. Unemployment Rate
  12. Labor Market Conditions Index
  13. NFIB Small Business Optimism
  14. Wholesale Inventories
  15. Wholesale Sales
  16. IBD Economic Optimism
  17. Mortgage Apps
  18. Retail Sales
  19. Bloomberg Consumer Comfort
  20. Business Inventories
  21. UMich Consumer Sentiment
  22. Empire Manufacturing
  23. NAHB Homebuilder Confidence
  24. Housing Starts
  25. Building Permits
  26. PPI
  27. Industrial Production
  28. Capacity Utilization
  29. Manufacturing Production
  30. Dallas Fed
  31. Chicago Fed NAI
  32. Existing Home Sales
  33. Consumer Confidence
  34. Richmond Fed
  35. Personal Consumption
  36. ISM Milwaukee
  37. Chicago PMI
  38. Pending Home Sales
  39. Personal Income
  40. Personal Spending
  41. Construction Spending
  42. ISM Manufacturing
Beat expectations (6)
  1. Markit Services PMI
  2. Nonfarm Payrolls
  3. JOLTS
  4. Case-Shiller Home Price
  5. Q4 GDP Revision (but notably lower)
  6. Markit Manufacturing PMI