Is the global economy on course to crash again?
Picture: Alamy
By Peter Spence, Economics Correspondent
3:55PM BST 14 Jul 2015
While many indicators are telling us we can enjoy stellar growth over the rest of the year, others suggest that the next crash could be on the way
The growth outlook for the rest of the year looks positively rosy. But economists aren't always the best bunch at spotting a coming crash.
A sell-off in bonds - a place where you want to put your money when you're not confident about growth - suggests that investors are becoming more optimistic.
But if history is a useful guide, then the US may already be due another recession. The average post-war growth streak has lasted less than five years.
And the Bank for International Settlements, the so-called central bank of central banks, has warned that policymakers may not have room to fight the next financial crisis.
So are economists being too complacent? Do they risk ignoring some major warnings signs about the global economy's health?
Here are some alternatives measures you can look at to determine where the world's financial system is headed.
Is transportation being grounded?
ADVERTISEMENT
While stocks and shares may not tell us much about the real economy, the transport industry supposedly does just that.
And while equities are doing well, David Woo, a strategist at Bank of America Merrill Lynch, said: "The transportation market does not share this optimism."
Shipping freight rates are down 40pc so far this year, and "are showing no signs of recovery", according to Mr Woo. And BoAML's latest trucking survey shows "sentiment at the year-low" while rail traffic "remains very weak".
Mr Woo said: "The bellwether China export containerised freight index is down 40pc so far this year and is now below the trough associated with the height of the eurozone crisis in 2012."
"In sum, what the transportation market is telling us is that global trade growth is weak," Mr Woo said, something he noted was reflected in recent manufacturing surveys, too.
One of the most (in)famous measures of this kind, the Baltic Dry Index, is often touted as a leading indicator for economic downturns. The BDI plummeted at the time of the Lehman crash, and hasn't recovered.
The BDI is a gauge of shipping costs, and it swings in response to quirks such as port closures and other idiosyncrasies related to shipping. It also tends to move along with commodity prices.
However, those hoping that it will tell them the future will probably be disappointed.
The BDI tends to plunge when supply of newly built ships rises, rather than just on the basis of sinking goods demand. So, not always something to worry about.
Last year Jim Leaviss, of M&G, also put the boot into the BDI. As he put it, the BDI is more likely to be predicted by US Treasuries, than the other way around.
Is China running out of power?
Increasingly, China is the engine that drives the global economy. At only 16pc of global GDP, it still accounts for around a third of total growth.
And a favourite hipster index for the country's performance was invented by its own premier, Li Keqiang.
Revealed to a US ambassador in 2007, the "Li Keqiang Index" is an alternative to China's official GDP figures and simply sums growth in rail freight, electricity use, and bank loans.
Mr Keqiang described the official GDP statistics as "man-made" and unreliable, existing "for reference only".
His index suggests that the economy grew by 1.3pc in March compared with the same month a year earlier, well below the country's 7pc target rate.
However, since Mr Keqiang became Premier in 2013, China has repositioned away from the manufacturing intensity it displayed when he made those comments, and towards services, meaning his own index has dwindled in importance.
With that change in mind, the official GDP figures may be a better guide, even if they're still considered to reveal partial truths. Lombard Street Research publishes its own estimates, suggesting that growth is currently less impressive than the official data.
It believes that China's economy actually shrunk by 0.2pc in the first quarter of the year, its worst performance since the global financial crisis. Diana Choyleva, an economist at Lombard, said: "Beijing has so far held firm in the face of weak growth."
China's communist rulers have chosen to pursue more liberal economic policies, she said, but sceptics of "its ability to rebalance without a major crisis are right to worry, as the task is fraught with uncertainty".
Are bonds telling the whole truth?
The aforementioned bond sell-off, one of the most dramatic since the taper tantrum of 2013, "suggest that the rates market is turning more optimistic about global growth", said Mr Woo.
Investors might believe that the economy has now recovered from the battering it received seven years ago, and that central banks will feel comfortable turning off the taps on loose monetary policy.
And the decoupling of bond yields from oil prices "also implies that deflation concerns have waned", he added. But their movements might be explained by other, less positive developments.
There's been a big increase in US companies issuing bonds to raise money. The rate is now some 20pc higher than where it was a year ago. A lot of the cash raised is going towards M&A and share buybacks.
Mr Woo noted that this has pushed the financing gap of non-financial companies to extremely high levels. It's now "starting to reach heady levels associated with 1999-2000 and 2006-7", he said.
He said: "It is difficult to know when the current boom will come to an end, but the past 20 years have taught us that when financial engineering reached these heady levels there can be trouble ahead.
"The fact that corporate profit growth is slowing just when the Fed is about the hike rates does not bode well and suggests that the Fed hiking cycle will be short," he added.
Is there reason to panic?
These fears aside, the traditional dashboard of economic health is now looking much better than it has been in quite some time.
Aside from some hiccups at the start of the year, developed countries are doing well.
Money supply is growing at a good pace, and while inflation is lower than many would like, the deflationary bogeyman appears to have vanished.
The focuses of attention recently have been on fairly minor economies. Greece - the nexus of recent concern - has an economy roughly the size of Conneticut.
If China has not quite been derailed, then there is only one big theme on the horizon that economists have to grapple with, and it's one that they've been thinking about since the crisis struck.
In the intervening period, the US's Federal Reserve has been unable to raise its interest rates. When it eventually does - and current thinking is that this will finally happen by the end of the year - economies could be in for a shock.
The Fed's first attempts to tighten up policy, turning off QE, caused a taper tantrum across emerging markets in 2013. There's a real risk that a misstep on rates could lead to a second round of pain for those same economies.