Global Economy: Businesses look bullish about the road ahead

Helsinki (Reuters): Businesses are heading into 2018 in a pretty optimistic mood, surveys will more than likely show in the coming week, pointing to a potential boost for already solid growth in the world’s biggest economies.

Preliminary readings of plans being made by purchasing managers - the executives who buy what their companies need - have already painted a bullish picture for the euro zone and especially for its two biggest economies, Germany and France.

IHS Markit’s flash Purchase Managers’ Index (PMI) for euro zone manufacturers climbed to 60.0 this month, well ahead of 58.3 in Reuters poll, marking the second-highest reading since the index was first collected in 1997. Anything above 50 indicates expansion.

November PMI’s for many other major economies are due next Friday.

“The mood in business is good at the moment... Industrial output is performing well,” said Hanna Freystatter, head of the international and monetary economy division at Bank of Finland.

“Basically all major economies are pointing in good direction and exports are being supported by the broad-based global recovery.”

PMI is seen as a good indicator of economic conditions and it is even preferred by some analysts to gross domestic product, which might be affected by poor seasonal adjustment and is prone to revisions.

In the United States - which is ahead of Europe in the growth cycle - the Institute for Supply Management’s (ISM) measure of factory activity is expected to come in at 58.5, slightly down from last month’s 58.7.

But in September, the index touched its highest level since May 2004.

While hurricanes that hit Texas and Florida in the past months disrupted business, US manufacturing is still seen being supported by a booming global economy as well as weaker US dollar.

In China, the Caixin/Markit Manufacturing PMI stood flat at 51.0 last month, reflecting slowing GDP growth and indicating further modest improvement ahead.

A Chinese slowdown is one of the major risks to continued global growth, so a major change in this report could cause some concerns.

Some analysts have noted that the government’s production curbs to reduce pollution have added to companies’ cost pressures and may hamper industrial activity in the months ahead.

But China’s economy has surprised markets so far this year with a growth of nearly 6.9% on the back of a renaissance in long-ailing “smokestack” industries such as steel.

“This growth is expected to slow down gradually to around 5% pace, which is only desirable as the growth at the moment is debt-driven,” Freystatter from Bank of Finland said.

In Japan, Markit/Nikkei Manufacturing PMI has held up above the 50 threshold for 14 consecutive months, while British factories also reported good activity through the autumn.

Any day now

Although business surveys show more inflationary pressure in the eurozone, that has not translated into prices, which has supported the European Central Bank’s case for only gradual removal of stimulus.

The ECB opted last month to halve its asset purchases while extending them by nine months, arguing that inflation still needed support to rise towards its target of almost 2%.

It also kept the bond buys open-ended, although policymakers were far from unanimous on that decision.

“We’re really in a situation where everyone is looking at inflation and thinking ‘any day now’,” said ING economist Bert Colijn.

Flash inflation in November, due on Thursday, is expected to have speeded up to 1.6% from 1.4% in the previous month, while prices excluding energy and food are seen increasing 1.1%, a similar pace as in October.

“Taking into account the strong growth and decreasing unemployment, we should of course start to see gradual price pressure. But there are many uncertainties related to this,” Bank of Finland’s Freystatter said.

Some policymakers have argued that globalisation and technological changes have made value chains more international, making low inflation a global phenomenon and limiting central banks’ ability to control prices in their own jurisdiction.

But some reckon expected wage growth in Germany is one factor that should boost price pressures in the bloc next year.

“Inflation will likely fall at the start of the year...but after that we will see a pickup, and I think that the market doesn’t price that as yet,” said Morgan Stanley economist Daniele Antonucci.