Global economy expected to witness a “V-shaped” recovery – Westpac

Richard Franulovich, the head of FX strategy at Westpac, notes that New Year has produced material downside surprises in two of the most widely watched U.S. data points with the ISM manufacturing index unexpectedly crumbled to 47.2 in December, while average hourly earnings in the December payrolls report eased back to a 2.9% annual pace.

• "Given the weak state of US manufacturing implied by the ISM survey the US economy "needs" the consumer to step up. But a slower pace of income creation raises risks for the consumer and underscores a continuing low inflation backdrop.
• These closely watched data points may be exaggerating the downside risks. A range of other soft surveys such as Markit's manufacturing PMI, the ISM services index and the NFIB small business survey have been much more resilient than the ISM manufacturing index.
• The labour market is by any reasonable measure still in very good shape too. Payrolls growth remains well above the pace needed to absorb new entrants. A less robust pace of earnings growth no doubt raises risks to consumer spending but a 2.9% annual pace is not too shabby.
• Elsewhere, various lead indicators signal a potentially decent uplift in global activity in 2020.
• A simple composite global leading index comprising the US 10y-3m yield curve, the expectations sub-index of the German ZEW survey, Chinese new yuan loan growth and Korea 20-day export growth.
• It might be too much to expect a true "V-shaped" recovery for the global economy given all the usual risks such as a possible relapse in the US-China trade war, geopolitical hotspots and US election uncertainties, not to mention the serial disappointments over global growth in recent years. That said, at a minimum the ingredients at the very least seem to be in place to make 2020 a potentially better year for the global economy. That should be good news for global growth proxies like the AUD."