Global Economy – Surveys are still robust but questions remain on the USA and BRIC

The economic indicators remain strong in January with the exception of the BRIC index and the ISM index in the United States. This is what we can see in the chart below.

This graph, complex at first sight, reflects the perception by business leaders of their situation. An index above 50 indicates an improvement in their activity due in particular to higher orders, production or employment.  Interpretation is opposite with an indicator below 50.
To be noticed on the chart: the resilience of the UK and of Japan at the top of the graph but also of the Euro zone. This increased notably under the impetus of Germany but also of Spain and Italy.

The global indicator, in red, is stabilized well above the 50 threshold. The uncertainty comes from the U.S. index and from the BRIC. This last indicator consists of four countries (Brazil, Russia, India, China) dropped below the threshold of 50. In the U.S, the ISM index dropped to 51.3 against 56.5 in December.

The alarm caused by the collapse of the ISM can be understood well.
In the recovery phase of the global economy, the United States has a leading role. Since it refocuses on its own balance,  China no longer plays this role. This also creates uncertainty in emerging countries. These latter seek to find a more stable framework for their own growth process before dealing with the global economy.
Europe is still far from being a catalyst for global growth even though the UK is better.
The situation will not change very rapidly in emerging countries (see section below) and Europe remains fragile. Therefore if the United States does not play the role of leader in the recovery the global picture is blurred and the return to a more stable environment is suspended.
We should not worry too much of the decline of the U.S. index. Any traveler to the United States in January, especially on the East Coast, was able to realize the difficulties encountered due to the cold and snow. This is why it must not over-interpret this figure in January.
The situation remains strong compared with other indicators, including the United States. This does not prevent us to be very attentive to all these developments.

world-en-2014-january-pmiIn the BRIC index, the four components are close to the threshold of 50, showing that there really is no autonomous dynamics for this group of countries, in contrast to what was observed in the recent past.
China no longer plays the role it used to have and the other 3 countries do not have clearly put economic activity at the heart of their analysis of the situation. In press releases issued by the Brazilian Central Bank and that of India after their recent rise in interest rates, it was clear that the primary objective was to stabilize inflation even if it has a cost in terms of growth.
Therefore, as inflationary threats remain strong, the trade-off shall be in favor of inflation. In addition, investors are very sensitive to this issue because in trying to defend their inflation target, authorities also aim to stabilize their exchange rates.
Last week we saw, with the Turkish example,  that central banks cannot take this pressure lightly. The rise in interest rates by the Turkish central bank under pressures from investors was finally ineffective. The Brazilian and Indian choices are in a better defined framework and it is reassuring to investors.
In general, the strategy to stabilize inflation and therefore parity is one that will reassure the financial community. Conversely the decline of the currency causes inflation, which if unchecked creates a dynamic that is self-sustaining and that certainly push away investors.
This arbitration within BRIC for the fight against inflation makes the overall economy more dependent on the United States.

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