The plunging price of oil since June has been a leading indicator: global economic growth is in trouble, despite six years of unprecedented central-bank free-money policies that caused asset prices to soar but has accomplished little else. This scenario has now been confirmed by businesses that help drive the economy forward – not by economists and Wall Street hype mongers: their outlook for the next 12 months has plummeted since June to the worst level since crisis year 2009.
Business leaders are an optimistic bunch. Projecting a 12-month period that is worse than the past 12 months is frowned upon; because business leaders are supposed to make their business grow, even when it looks tough out there. They’ve been optimistic over the years, despite multiple recessions in the Eurozone, a slowdown in China, a quagmire in Japan, and disappointing growth in the US, where “escape velocity,” dangled out in front of our noses for five years, has become a figment of Wall Street imagination. Throughout, business optimism has been fairly strong, according to Markit’s Global Business Outlook, a survey taken in February, June, and October.
But results from the October survey, released today, are a doozie. The number of businesses around the globe that expect activity to rise over the next 12 months exceeded the number expecting a decline by 28%, the worst in the survey history going back to 2009.
This “net balance” was down from 39% in June. The peak of global business optimism in the survey’s history was in February 2011, when the net balance hit 48%. Manufacturing wasn’t that much of a problem; optimism fell “only” to the level of June 2013. But in the all-important service sector, by far the largest sector in most economies, optimism plunged to the lowest level in the survey’s history.
It was all-around lousy. In the UK, where businesses were among the most upbeat, so to speak, optimism about future activity fell to the lowest level since June 2013. In the Eurozone, which has been battered by a series of apparently intractable problems, optimism dropped to the already low levels of June 2013. The big drags on optimism in the Eurozone were in the two largest economies, Germany and France.
In France, the number of businesses expecting activity to rise over the next 12 months exceeded the number expecting a decline by only 12.6%. This was the second worst net balance of all countries in the survey. These businesses were the only ones in the survey projecting on average a cut in staffing levels. The report described the mood as “gloomy.”
In Japan, optimism hit a two-year low and came to rest even below the low level in the Eurozone, as businesses “have become increasingly disillusioned” with Abenomics.
In the emerging economies, business expectations about future activity plunged to new lows. While optimism edged up in China, it was barely off the near-record low in June. In India, it stagnated at low levels. In Brazil, optimism fell to match the previous record low. And Russia, oh my!
Russian businesses have struggled with sanctions, the swooning ruble, the shrinking price of oil, high interest rates, and waning domestic demand. They’ve been cut off from crucial Western funding sources. And key partnerships with Western companies have been thrown into turmoil. So the number of Russian businesses expecting activity to rise exceeded the number expecting it to drop by a tiny 9.8% – the most pessimistic of any country in the survey.
But the biggest hit on a global scale came from the largest economy, the US. While manufacturing businesses showed a decline in optimism, the big problem was the far larger service sector.
The Flash Service PMI for November, released today, hammered home the point: service sector growth slowed with nerve-wrecking consistency for the fifth month in a row, from its peak of 61 in June (above 50 denotes expansion) to 56 now.