The Global Economy in a Weak Spot?

Fri, 8 Jul Pre-Open

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As per the latest JPMorgan Global Manufacturing and Services Purchasing Managers' Index (PMI), growth worsened in the second quarter of 2016, growing at the slowest rate since the fourth quarter of 2012, a time when the world was struggling in the face of the escalating Eurozone debt crisis.

Global economic growth failed to pick up from the sluggish pace seen in May indicating the lack of growth drivers. This is evident in weak rates of expansion in the US and UK, linked in part to rising political uncertainty. Similarly, a struggling recovery in the Eurozone and renewed downturn in Japan also added further pressure.

The JPMorgan Global All-Industry Output posted 51.1 in June, unchanged from May. Service sector activity increased at a slightly faster rate than manufacturing production in June, although growth was subdued in both industries.

Of the four largest developed world economies, the Eurozone held on to the top spot in the PMI growth rankings, just by a slim margin, fuelled in particular by faster manufacturing growth. However, the surveys are signaling just 0.3% GDP growth. The UK also continued to expand, though much of the June data were collected prior to the country's referendum vote to leave the EU. This means, in the coming months, the British and European economies are likely to slow further as political risk rises.

Growth also remained disappointingly weak in the US. As per PMI data, the US economy continued to grow at an annualised pace of just less than 1% in the second quarter. This represents the weakest extended period of growth seen in the US since the 2009 financial crisis. Businesses are struggling amid weak global demand, the energy sector downturn, the strong dollar and uncertainty caused by the upcoming presidential elections.

Japan remained the worst-performing of the major developed economies. The Nikkei PMI surveys indicate one of the worst periods of growth seen over the past four years. Manufacturing operating conditions in Japan worsened at the end of the second quarter of 2016. Production declined for the fourth month running, led by a drop in new orders. This is primarily due to a marked drop in international demand. This is due to the appreciation of the yen against the dollar, global competitiveness was reduced, which led to a decrease in trade volumes.

Chinese manufacturers reported the sharpest deterioration in operating conditions for four months in June, with output falling at the quickest rate since February amid a further drop in new work. The bright spot was services, which reported the strongest upturn for 11 months. This indicates rebalancing of the economy towards services.

The Nikkei PMIs for India picked up signs of faster growth in manufacturing, but also suffered a slowdown in service sector growth highlighting concerns regarding the sustainability of the economic upturn. However, India remains a leading performer within emerging markets at a time when many of its peers such as Brazil, China are struggling.

PMI data indicates that the fundamentals of the global market are unstable and shaky at the moment. This also signals uncertainty going forward.

However, it is important to note that stock markets have always endured such uncertainties. There will always be something that bothers the world. Markets can always have a bad day, week, month or even a bad year.

Rahul Shah, Editor of Microcap Millionaires puts it aptly - If you want to have success as a long-term investor, you have to look past these worries and invest in great companies that are available cheap and will be around 10, 15, 20 years from now.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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