Indicators point to slowing global economy

There are signs that global economic growth is slowing.

Surveys of purchasing managers around the world showed that industry activity continued to increase in May. However, the rate of increase apparently slowed as some of the indices compiled by JPMorgan and Markit showed declines.

JPMorgan Global All-Industry Output Indices
	April	May
Output	57.7	57.0
New orders	56.9	55.3
Input prices	60.9	59.2
Employment	50.8	51.4

Among the major developed economies, slower growth was most evident in the surveys of purchasing managers from the United States and the euro area.

In the US, the Institute for Supply Management's manufacturing PMI fell to 59.7 in May from 60.4 in April while the new orders index was unchanged at 56.7. The ISM's non-manufacturing index was unchanged at 55.4 in May while the new orders index fell to 57.1 from 58.2 in April.

In the euro area, Markit's composite purchasing managers' index for the manufacturing and services industries fell to 56.4 in May from 57.3 in April. The services index rose to 56.2 in May from 55.6 in April but the manufacturing index fell to 55.8 from 57.6.

There were also other economic reports last week that indicate the likelihood of slower growth ahead.

The US employment report on Friday showed that the underlying health of the job market may be too weak to sustain a strong recovery. While overall employment grew by 431,000 in May, temporary census jobs accounted for 411,000 of the increase. The unemployment rate did show a decrease to 9.7 percent from 9.9 percent in April but only because of a 322,000 reduction in the labour force.

A more worrying report for the US economy on Friday came from the Economic Cycle Research Institute. The ECRI reported that its weekly leading index fell to 124.1 for the week ended 28 May from 125.6 in the prior week. The index's annualised growth rate plunged to 0.4 percent, the lowest rate in 50 weeks, from 5.1 percent the week before.

Meanwhile, in Europe, first quarter growth for the euro area was confirmed at 0.2 percent last week and other economic reports, like the purchasing managers surveys, gave little hope of significant acceleration from there. A report from Eurostat on Thursday showed that retail sales in the region fell 1.2 percent in April. The European Commission reported on Monday that its economic sentiment indicator fell to 98.4 in May from 100.6 in April.

Growth in the euro area has been weak largely because bank lending has been weak. The European Central Bank's report on money supply and lending published on Monday showed that M3 remained 0.1 percent lower in April than the year before while loans to the private sector managed to edge up just 0.1 percent.

The financial situation in Europe could yet worsen as the ongoing debt crisis could further impair European banks' ability to lend. In its Financial Stability Report also published on Monday, the ECB warned that banks may have to write off 195 billion euros of bad loans by 2011. In addition, large near-term funding requirements of governments could crowd out issuance of bonds by banks, raising funding costs and hence further adversely affecting profitability.

Investors clearly remain nervous about Europe's sovereign debt problems. While some of the recent turbulence appeared to be dissipating from markets for much of last week, on Friday, remarks by the Hungarian prime minister's spokesman about a potential debt problem sent stock markets and the euro tumbling again.

The MSCI World Index of stocks in developed markets fell 2.8 percent on Friday and is now down 9.3 percent year-to-date. It is 14.6 percent below its peak in April.

The stock market is supposed to be a leading economic indicator and it, like many of the other indicators released last week, is not giving a very positive signal for the global economy at the moment.