In this Tuesday, July 19, 2016, file photo, a man fills out a job application at a job fair, in Miami Lakes, Fla. On Thursday, Feb. 16, 2017, the Labor Department reports on the number of Americans seeking unemployment benefits.
The global economy is facing a daunting challenge after Brexit and after the inauguration of Donald Trump as the President of the United States.
Various stakeholders, such as market participants, are anxious for global economic prospects. However, there are signs of optimism where the world economic cycle indicates promise within the next semester.
Several indicators
There are six key indicators, which support the optimism regarding the development of the global economy.
The first indicator is the unemployment data every week in the US labor market. The indicator constitutes an early marker of US economic strength. The unemployment data is a lagging indicator from the US economy. If the US economy experiences a slowdown in this quarter, the unemployment rate will likely rise in the next quarters. There will be a lag between economic performance and the number of unemployed citizens in the US. Moreover, the US unemployment data can be used as a short-term projection of the US economy.
The US unemployment data is renewable and available weekly. Based on the analysis, the US unemployment data constitutes a leading indicator of the US stock prices. Overall the US unemployment rate was low in January, which indicated a downward trend compared to previous months. This is reinforced by the improvement of US stock prices, both of which are recorded by the Dow Jones and Nasdaq.
The second indicator is the Institute for Supply Management Manufacturing Index
(ISM). This index is a strong marker for the projection of the US economy in the next three to six months, even though the share of the US manufacturing sector to Gross Domestic Product (GDP) is relatively small compared to other key sectors. In line with the declining unemployment data, the US ISM data strengthens optimism in the US economic recovery.
The third indicator is the subcomponent data of the ISM survey, namely the data on the number of new orders for manufactured products and their inventories. In January, there was an increase in the number of new orders for the manufactured products in the US amid the relatively low amount of inventories. This indicates there will be additional production in the future in meeting the orders, which means there will be acceleration of US economic activities.
The fourth indicator is the ratio of retail expenditure on industrial products in China. This figure can be used as a marker of the economic tendency cycle and an indicator for the Chinese economic structural changes from an outward looking to inward looking economy. This is a very important indicator for the Chinese economy and for the global economy in the future.
Even though the ratio of retail expenditure on industrial products looks uncertain, there is has been an increase since the global financial crisis in 2008. This shows that the Chinese public consumption spending remains strong amid the drop in its industrial output.
The fifth indicator is the South Korean international trade data, which is consistently reported on the first day of each month, the fastest compared to other countries. South Korea is a country with an open economy and has trade partners around the world. Its major partners are the US, China, Japan and the European Union, so South Korean international trade data can be used as an indicator of global trade performance.
After a decline over the last several years, South Korean trade data has shown signs of recovery since November 2016, especially its exports growth and increased significantly in January 2017. By watching South Korean trade data, optimism in global economic performance will grow.
In observing South Korean trade data, the slowdown in recent global trade could be a temporary phenomenon. The cause could be various factors, including the EU’s prolonged crisis, a sharp decline in commodity prices, a sharp slowdown of the economy of Brazil, Russia and other emerging economies and the strict regulations on international banking, which hampers the financing of global trade transactions. If this is valid, the global economy is recovering, if not interfered with by Trumponomics.
Entering the recovery phase
The last indicator is the monthly Ifo Business Climate Index for the German economy. This data can be used as an indicator for the European economic cycle as a whole, considering Germany is the center of the European economy. If the index is increasing, it can be interpreted that the European economy as a whole is increasing. The Ifo survey noted that since the second semester of 2016, its figure has shown an upward trend.
By closely evaluating the six major indicators above, the global economy is in a recovery phase, even though its process is overshadowed by the negative consequences of Brexit and USxit. The six indicators have sent a signal that in the next semester the global economy will experience significant performance improvement. Certainty of the projections depends on the Trump protectionist storm, Brexit implementations and presidential elections in France in June, which could hamper the rate of global economic recovery.
