Global growth accelerated sharply in Q2, as activity in both the US and China swung back sharply following the very weak start to the year in both regions. However, part of the re-acceleration was due to temporary factors and we look for some moderation during H2. This does not mean the global recovery will falter but simply that the pace goes down a bit. What’s the driving force behind slower growth in H2?:
First, US growth is expected to slow from 4% in Q2 to a 3-3.5% pace in H2. We already see some confirmation of moderation: Private consumption – the main engine of the US economy - rebounded sharply in Q2 in response to the depressed winter sales but retail sales for July point to a slower growth pace in early Q3, as consumption growth normalises again following the catch-up. Markit PMI released this week reached a new cycle high but the details reveal that inventory building was behind this move higher and thus this is likely to be of a temporary nature. The expected slowdown is far from a disaster, though, and should be viewed as a return to the underlying pace of growth. We believe this underlying pace of growth is actually strengthening, as the fiscal headwind is easing significantly and housing is gaining back its strength following the weak spot on the back of a sharp rise in mortgage rates last year. This week’s existing home sales and housing starts provided more evidence that housing is indeed recovering again, providing renewed support to the US economy.
Despite a slower pace of growth in H2, we expect the US job market to stay strong as confidence in the recovery is gaining ground and companies increase hiring. Layoffs have already been reduced a lot, as witnessed by the low initial jobless claims but companies have been more hesitant to increase hiring. We believe this will change and contribute to solid job growth during H2 with around 250k-300k per month.
Second, turning to China, activity seems to be peaking following the re-acceleration during spring and summer. Chinese Flash PMI for August surprised to the downside showing the first decline in four months – see China: manufacturing PMIs appear to have peaked, 21 August 2014. Again this should not be seen as the start of a new sharp slowdown but a continuation of the pattern seen over the past three years, where growth has fluctuated between 6% and 9%. Following a couple of quarters with stronger growth fuelled by both fiscal and monetary stimulus, activity is cooling off a bit as these effects fade. The peak in PMI was 1-2 months earlier than we expected but overall not far from our baseline scenario of some slowing of Chinese growth during H2. We look for the economy to expand 9.0% q/q AR in Q3 and 7.8% q/q AR in Q4 with slight downside risk following the August PMI. Apart from easing economic stimulus, the weak housing market is also weighing on the economy. Property prices this week showed a further decline in prices in the big cities of 1.0% m/m in July.
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