Introduction to our Global Growth Barometer

Markets are forward looking, but that doesn’t mean it is not important to have an understanding of the current growth picture. That’s easier said than done though. Economic data is usually released with a lag, it is noisy, and it is often not clear what is important and what isn’t.

Our solution to this problem has been to construct an indicator of current economic growth, which combines many higher frequency data points into one summary measure using some simple statistical analysis[1]. The outcome of this analysis is a decomposition of global growth into regions and economic sectors, which tells us where growth is relative to normal and what is driving changes.  

Below, we show the USA Growth Barometer since 2016. Readings above (below) zero represent growth above (below) average. The Barometer clearly shows the slowdown in growth in the USA last year, driven in large part by the industrial sector – reflecting the impact of the trade war. Interestingly, after many years as a source of strength, the consumer also detracted from growth last year, perhaps in response to higher interest rates.

The chart below shows the Australian Growth Barometer in the post GFC period. We can see that domestic growth has been quite weak, first led by consumer weakness and declining business investment (industrial sector), followed by weakness in the housing market which intensified in 2018 but has since recovered.  

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There are a number of ways that we use the Growth Barometer to improve investment decision making.

• Movements in global equity markets are around 70% correlated with the Growth Barometer. While the relationship is coincident, rather than leading, it does let us know if markets are consistent with the economic fundaments. For example, the sell-off in equity markets in December 2018 was materially worse than the current data read would have suggested (i.e., markets were pricing in a material deterioration in economic data, which didn’t occur).
• There is also a very high correlation between the Growth Barometer and earnings revisions. The Barometer currently suggests that earnings should be revised upward at a moderately faster pace than they currently are.  
• The Barometer also exhibits some persistence, which means if growth is improving this month, it is more likely to improve in the next month than worsen. With this in mind, the Barometer’s trend will help us build conviction around portfolio positioning.
• The Barometer can also help build evidence around whether the macroeconomy is evolving in line with our expectations. If we expect growth to rebound, but the Barometer suggests a persistent slowing, it is a trigger to reassess the central view.
  

So, having now explained the Barometer and how we find it useful, what is it currently telling us?

We think there has been a meaningful acceleration in growth since the last quarter of 2019, driven largely by an improvement in the industrial sectors of the USA and Asia. This gives us some conviction that the material rally in equity markets over this period is driven by a fundamental improvement, rather than exuberance. The Barometer also tells us that the improvement in growth that we had expected from the second half of 2019, when we increased equity exposure, is likely eventuating.

[1] We capture around 150 data releases across four sectors of the economy (consumer, housing, industrial and labour market) for four economic regions (USA, Europe and Asia and Australia). For each region and sector (US consumer for example) we conduct principal components analysis for the data releases which are pertinent to that underlying economic driver. The 1st principal component represents the underlying trend for that regional sector. Within each region, we regress each sector’s 1st principal component against economic growth to define its beta to overall growth. These betas are used to create sector weights, which are multiplied by the sector’s 1st principal component and then summed to create an estimate of the region’s growth. The Global Growth Barometer is a simple average of the US, European and Asian Growth Barometers.