Official figures from Germany this week showed that industrial production fell by a greater-than-expected 1.2 per cent in August, and with new orders dropping 1.8 per cent in the month, there is little hope of a strong upturn soon. Although UK manufacturing was stronger in the month, rising by 0.5 per cent, this only partly offset a slump in July, which means that output in the last two months was below Q2's level. Worse still, the services sector is also slowing; purchasing managers this week reported the weakest growth since April 2013. Following last week's news of disappointing manufacturing activity and slower employment growth in the US, all this reinforces fears of a global slowdown. World growth, says economic consultant John Llewellyn, is "disappointing and uneven."
This isn't just a concern for equity investors. It might also mean continued low returns on cash. Danny Gabay at Fathom Consulting says a UK rate rise is now "a very distant prospect": he doesn't expect one until 2017.
These worries were highlighted this week by the IMF. "Downside risks to the world economy appear more pronounced than they did just a few months ago" warned its chief economist, Maurice Obstfeld. He added that it was "essential" that monetary policy be "accommodative".
However, bond markets fear that the Fed will not heed this call. The five year break-even inflation rate - the gap between nominal and inflation-proofed Treasury yields - has fallen to below 1.2 percentage points, close to its lowest level since 2009. This means that markets expect the Fed to persistently miss its target of 2 per cent inflation - implying that they expect policy to be too tight.
Not everyone, however, is so gloomy. Ethan Harris at Bank of America Merrill Lynch points to reasons for optimism. "Banks have started to support rather than inhibit growth" he says, and fiscal policy is no longer a drag; the OECD expects the euro area to see only 0.1 percentage points of tightening next year and the US only 0.2 percentage points, after four years in which policy has tightened by three and 5.8 percentage points respectively. And, he adds, the Bank of Japan and ECB could step up quantitative easing soon. Growth, he says, will "pick up modestly next year."
