US: Growth leadership fading – Westpac

Richard Franulovich, Research Analyst at Westpac, suggests that tentative signs are emerging that the US’ growth “leadership” position in the global economy is fading.

Key Quotes

“Both sides of the equation seem to be at work - less weak activity overseas and weaker headline GDP growth in the US. This is probably not the start of a meaningful trend – the US seems to face fewer long term headwinds to sustained growth than either the Eurozone or China – but it may nevertheless be enough to upend the USD for a while.

Advance US Q2 GDP growth was of course well below consensus at 1.2%, though a large draw on inventories accounted for much of the miss. Real final sales were healthier at 2.6%. US GDP tends to be revised higher over time too – the last six advance releases all missed expectations but lately the 2nd and 3rd updates have been revised higher. That's the good news. On the other side of the ledger:

By comparison, the Eurozone grew 1.8% annualised in 2016H1, almost double the US 2016H1 growth pace, though much of the upside surprise admittedly occurred in Q1, while Q2 GDP growth was about the same as the US at 1.2% annualised. Nevertheless, there’s no escaping that Eurozone growth in H1 has surprised on the upside while US growth has fallen well short of expectations. China faces significant headwinds and skepticism over her long term prospects runs deep but official data there has not underwhelmed anything like it has in the US either – Q1 China GDP matched consensus at 6.7% while Q2 came in slightly stronger than expected at 6.7%.

Underwhelming US growth vis-à-vis other blocs should exert a palpable impact on both bond spreads and FX rates.

The July PMIs may be just one-round of data but they too tell a similar tale of diminished US outperformance. The US the manufacturing ISM came in weaker at 52.6 vs consensus at 53. The relatively stronger bounce in the US PMI so far in 2016 seems to have faltered in July, the US PMI falling slightly while the global and emerging markets PMIs both rose in July.

Interest rate differentials and overall relative rates of return are ultimately shaped by relative growth trends. As China and the Eurozone slowed in recent years while US growth continued to plod along yield and growth differentials swung sharply in the USD’s favour, explaining much of the USD’s rise in recent years. That trend was already stalling in recent months. The latest weaker US Q2 GDP and July PMI data provide more circumstantial evidence that a key story that has underpinned the USD’s appreciation may be starting to fray at the edges.”