Global Economic tracker June21 update

Its Boom time

First, contain the virus – nothing else matters unless you do
Further, support the economy – recovery would take time
Let the capital markets be – they will find their own level

It has been an exciting last 6 months for the global economy. Only 3 months back, we were tracking the global Covid19 case rate. The focus has shifted completely to tracking the global vaccination rate, which has been instrumental in containing the virus and allowing economies to reopen. The linkage between vaccination rates and economic growth has been stark – US leads, with China/ EU following close behind (3-6m lag). Japan (surprise) and India have been laggards – their economies too. Global economic growth continues to recover well in 1Q21 – US/ India back on growth, but note the low base. EU/ Japan/ UK all declined, despite the low base. Yet 2Q21E will handily steal the limelight – its boom time baby – mostly cyclical boom (given the extraordinarily low base) yet we expect the strength to last through 2021E at least (excess savings and household balance sheets to drive consumption, the largest share of global GDP). Sustainability will be the topic best left for 2022E. The leading indicator (PMI) is saying absolutely nothing different – continues to go from strength to strength on mom and base Dec19 (pre-Covid19 levels). Yet one indicator is also flashing red – Input (largely commodity)/ Output (Finished goods and services) prices are strongly/ moderately outpacing economic activity – this is the standard transitory/ structural Inflation debate – yet which trend breaks first (prices/ output) will decide the sustainability of economic growth.

References (writeups in the series) :
https://determinedinvest.wordpress.com/2021/03/15/global-investment-tracker-mar21-update/
https://determinedinvest.wordpress.com/2021/03/12/the-buffett-indicator-revisited/
https://determinedinvest.wordpress.com/2021/01/03/macro-asset-allocation-portfolio-notes-dec20/
https://determinedinvest.wordpress.com/2020/12/18/covid19-economic-impact-nov20-update/
https://determinedinvest.wordpress.com/2020/09/14/global-investment-in-times-of-crisis/

• From Covid19 case rate to vaccination rate. It has been an exciting last 6 months for the global economy. We were fretting about whether and when vaccines for Covid19 will be available (and if so, how effective are they likely to be last year). We were answered by Dec20 – not one, not two but three vaccines were made available (many more since). Then we were worried about the vaccination programs (spread, hesitancy) – so much so that our focus was still on global Covid19 case rate in our Mar21 update. Today, the focus has shifted completely, to tracking the global vaccination rate. The three largest global economies – US, China and EU – have done a fabulous job on their vaccination programs. Our conservative mindset lost – innovation and human perseverance won. Yet no doubt the gains are concentrated in Developed/ Middle Income economies, and Emerging economies (LatAm, Asia – notably India, very little data coming out of Africa) both continue to lag on vaccinations and struggle economically (relatively). Hence the importance of comprehensive vaccination programs (of course once low-cost vaccines became available) – in its absence, it is very difficult for any attempt to open up the economy to succeed. Japan has been the surprise – no resource constraint/ otherwise a very advanced and active healthcare system but grouped similar to emerging markets wrt its vaccination rate.

• Global economic growth – to boom in 2021. Figure 2 provides the details for 1Q21 economic growth (first estimates) across major world economies. China very clearly the outlier, enjoying the low base from last year, yet largely managing to keep its economic momentum intact from Covid19 led by (a) strong testing and tracing and (b) manufacturing/ trade. Yet US has been the surprise package in 1Q21 delivering moderate growth from a none-too-weak base. We would have characterized India in the same basket but everyone knows how things are going to shape up in 2Q21E (although yoy may yet look good optically, disappointing in reality). EU/ Japan/ UK all declined, despite the low base. Yet, the markets are looking forward and we are in no doubt that 2Q21E will handily steal the limelight – its boom time. For sure cyclical boom (given the extraordinary low base) but expect the strength to last through 2021E at least – China continues to remain robust, US will continue to gain in strength and EU/ UK will likely accompany them by 3Q21E. The leading indicators (PMI, our Private Industrial Activity index derived from PMI) have support this hypothesis. Even mom (month-on-month) global PMI readings have continued to gain in strength despite already being much ahead of the last recession recovery (2010) levels. Excess(-ive) savings and strong household balance sheets expected to drive consumption, the largest driver of global GDP.

• Global composite PMI – now strong expansion. Figures 3-5 present the Global composite PMI trends, including breakdown across its key components (manufacturing vs services, et al). We already highlighted that Global composite PMI has moved to its highest level in the last 13-14 years in May21 – yet let us put this point in context – China has already recovered back to its pre-Covid19 growth path and likely US/ UK as well (in 2Q21E). Yet economic activity in EU is still much below normal levels, constrained by mobility. There are another 6 months of likely very strong PMI readings for EU on the horizon for it to reach normal. This does not yet count Japan or India (weak PMI reads lately). It also does not take into account LatAm and ASEAN (South East Asia), relatively small economies individually but large mining and manufacturing economic blocks in aggregate. This might yet be a cyclical boom but there is still plenty of time (2021E at least) for this boom to continue. Sustainability can be a topic better left for 2022E – dance for now, cause the music is playing. Manufacturing led global composite PMI initially – Services have joined the party now – Consumer Services the main drag here (mobility restriction + hesitancy) but will also witness pent-up demand in 2H21E. The indicator that is flashing red – Input/ Output prices that are sharply/ moderately outpacing output – keep watch on which one of these breaks first and how it trends thereafter.