ARKANSAS, Oct 30 (Future Headlines)- The third quarter of 2023 presented a mixed outlook for global economic activity. While the United States and China demonstrated signs of recovery, other parts of the world continued to grapple with sluggishness. The Netherlands Bureau for Economic Policy Analysis (CPB) reported a meager 0.4% increase in global industrial production in August 2023 compared to the same month the previous year.
However, trade volumes told a different story, with a notable decline of 3.8% in August compared to a year earlier, marking a year of stagnation. This downturn in trade aligned with the signals of a looming recession (“World trade monitor,” CPB, Oct. 25).
The world’s two largest economies, the United States and China, exhibited signs of acceleration in the third quarter following a noticeable slowdown in the first half of 2023.
In the United States, preliminary estimates indicated that real gross domestic product (GDP) had grown at an annualized rate of 4.9% in the three months from July to September, up from 2.1% in the previous quarter. This acceleration was primarily attributed to increased consumer spending, particularly on services. While manufacturing activity continued to decline, there were clear indicators of an impending cyclical trough and subsequent expansion.
Another positive sign for the U.S. economy was the downward trend in initial claims for unemployment benefits, indicating an improved labor market. However, the increase in service sector prices from 3.3% to 5.2% in the three months ending in September raised concerns about potential inflationary pressures.
The second most substantial contributor to GDP growth in the United States in the third quarter came from business inventories. Typically, contributions from inventory changes are short-lived and are reversed within a few months, potentially creating headwinds in the fourth quarter.
Real final sales to private domestic purchasers (FSPDP), a measure that factors out volatile changes in inventories, trade, and government spending, increased at an annualized rate of 3.3% between July and September. This growth marked a significant acceleration from previous quarters, affirming that the U.S. economy had returned to moderate growth.
Despite these positive indicators, there were concerns about the sustainability of this rebound. The labor market and energy supplies were stretched, with an unemployment rate of just 3.8% in September and significantly reduced inventories of distillate fuel oils, potentially affecting future growth and contributing to inflationary pressures.
China also demonstrated a return to growth in the third quarter, following a second-quarter slump. The manufacturing purchasing managers index (PMI) improved over four consecutive months, reaching the 38th percentile for all months since 2011 by September. Notably, the volume of containers handled by China’s coastal ports increased by almost 8% in September compared to the previous year. Electricity generation in China surged by 9% in September compared to the previous year, with significant increases in power consumed across various sectors.
China’s recovery had a positive ripple effect on other regional economies. Singapore, serving as a major transshipment hub for trade between Asia and Europe, experienced accelerating freight volumes. However, Japan’s air cargo volume remained stagnant, while South Korea’s KOSPI-100 equity index rebounded initially but later weakened, indicating a downturn in global trade.
Global container shipping rates declined again in September and October, despite a summer increase, signaling continued weak demand.
In contrast to the positive developments in the United States and China, Europe remained the weakest region, grappling with the combined impact of higher energy prices, trade flow disruptions due to Russia’s invasion of Ukraine, inflation, and higher interest rates. Euro zone manufacturers reported a 16th consecutive month of declining business activity in October. In Germany, energy-intensive manufacturers reported output was down by 16% in August 2023 compared to January 2022, with no signs of recovery.
Uncertainty loomed over the economic outlook, as is typical during turning points in the business cycle. While accelerated growth in the United States and China could signal a resumption of the expansion in 2024, it is worth noting that growth was largely concentrated in services, which could dampen international trade flows.
Furthermore, inflation in the service sector persisted, and limited industrial capacity and raw material inventories hinted at the potential resurgence of merchandise inflation. The financial markets anticipated that the U.S. central bank would need to maintain higher overnight interest rates to prevent a resurgence of price pressures in 2024. As a result, yields on longer-term government securities, which serve as benchmarks for corporate and household borrowers, were on the rise. For instance, yields on 10-year U.S. Treasury notes had reached 4.9%, the highest level in 16 years, up from 3.5% at the end of April.
The continuation of elevated interest rates could lead to a repricing of a significant share of lending to higher levels, impacting business investment and household spending. In the United States, business spending on new equipment had already been affected by increased borrowing costs and economic uncertainty.
The situation was reflected in the performance of nondefense capital equipment orders, which showed minimal growth over the last 12 months in nominal terms. These developments raised questions about the sustainability of the ongoing economic rebound and the potential challenges ahead.
Reporting by Sarah White