Wealth Insights (June 2017)
Not Just A ‘Soft’ Data Rally

Richard Jerram
Chief Economist, Bank of Singapore
Member of OCBC Wealth Panel

Claims that the bounce in economic activity is only evident in the “soft data” are inaccurate. It is certainly the case that “soft” data on business and consumer confidence has rebounded strongly in recent months – especially in America – but “hard” data has also improved.

Financial markets often use purchasing manager indices (PMIs) as an easy guide to the economic cycle. These have the advantage of providing a timely and broad insight into individual economies. We recently saw flash releases for May, supporting our view that the momentum behind the recent bounce is starting to fade.

However, PMIs are “soft” in that they are not measuring actual production of goods, or spending in shops, or hiring of workers. Also note that PMIs are produced by private firms, which lack the depth of resources or statistical sophistication of most government agencies.

“Hard” data typically takes longer to compile, so is less timely, although one compensation is that it offers a rich amount of detail, which can help us to understand the dynamics of the cycle.

Rebound in trade

The latest release for global trade and industrial production shows that the recent bounce in the economic news flow was not purely an improvement in sentiment. The data only runs as far as March, but it shows a clear pick-up in both trade and output over the previous six months, after a couple of sluggish years.

The same rebound has been seen in the trade and production data of various individual economies around Asia and, more generally, helps to explain the lift away from the risk of deflation.

The recent rebound in activity was driven by a convergence of factors, many of which look relatively short-lived. Policy stimulus in China, a bounce in commodity prices and a sharp technology cycle are just some of the recent positives that seem likely to fade in coming months. This means that the current situation is about “as good as it gets” and momentum will fade. This is already evident in the economic surprise index, which shows that economic releases are no longer coming in ahead of expectations.

Economic surprise indexThis conclusion is not particularly sinister. Slower growth momentum is not the same as suggesting a slide back into recession. Normally, recessions are caused by external shocks, or by tight policy. In most developed economies, fiscal policy is roughly neutral while monetary policy is still very accommodative, which means that the current expansion should continue.

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