Halfway through Q4, countries are releasing Q3 GDP numbers and many research outlets happily note economies are finally growing in sync. Huzzah! Granted, broad-based global growth isn’t necessary for equities to rise higher—this bull market has run eight years despite weak spots and regional contractions—but it shows how far the expansion has come. Whilst backward-looking, these GDP reports show the global economy was in solid shape entering Q4. More investors are realising this reality could contribute to warming investor sentiment—a bullish development.
US Q3 GDP rose 3.0% annualised, a smidge below Q2’s 3.1%—the first back-to-back quarters of 3% growth in three years. Whilst headlines called this “impressive growth despite hurricanes,” key areas experienced slowdowns. For example, personal consumption expenditures slowed to 2.4% from Q2’s 3.3%, and trade was also weaker: Exports rose 2.3% and imports contracted -0.8% (compared to Q2’s respective 3.5% and 1.5% rates). This import contraction actually contributes to a higher headline GDP number—a statistical quirk as GDP calculates trade as net exports (exports – imports)—which misses the fact imports represent domestic demand.
Q3’s big GDP contributor, though, was gross private domestic investment (GPDI), which sped up from 3.9% in Q2 to 6.0% in Q3. However, this wasn’t due entirely to big business investment. Rather, change in private inventories added 0.73 percentage point to growth—much higher than last quarter’s 0.12 percentage point—comprising the majority of GPDI’s overall 0.98 percentage point contribution to GDP. This metric is subject to interpretation, though. Are firms stocking up in anticipation of upcoming demand, or are they struggling to clear the shelves? We think it’s the former. Inventories were pretty depleted after Q1, and they barely budged in Q2. With demand still high, Q3’s rise seems like some good old-fashioned restocking.
Even with this context, don’t forget GDP gets revised frequently—both in the short and long term. Hurricane skew could still show up. Whether this leads to a higher or lower headline growth number, however, isn’t meaningful for forward-looking equities. What is relevant for investors: The US economy continues chugging along.
Whilst US growth persisted through some destructive hurricanes, two big September earthquakes knocked Mexico’s economy. Q3 Mexican GDP contracted -0.2% q/q (-0.8% annualised) as services fell -0.1% and industrial output dropped -0.5%. Analysts expect a Q4 rebound, led by a reconstruction-related construction pickup. Though disaster recovery spending isn’t stimulus, in our view, this does show how natural disasters can skew data temporarily. This was Mexico’s first contraction in 17 quarters, and whilst we can’t know how GDP would have done sans earthquakes, weak—and even contractionary—quarters happen during economic expansions. Overall, the Mexican economy hasn’t substantially changed, and considering some creeping dour sentiment toward the country—especially with contentious ongoing NAFTA negotiations—small positive realities could beat lowered expectations.
In the UK, Q3 GDP rose 0.4% q/q (1.6% annualised), higher than Q2’s 0.3%—a compelling counterpoint to those continually fretting Brexit’s economic impact. Services rose 0.4% q/q, same as Q2’s growth rate, led by the business services and finance sector (up 0.6%). Notably, all four main service industries[i] expanded, just as they did in Q2. Though services continue driving UK growth, it wasn’t the only contributor. Production’s four primary subsectors grew, too, with manufacturing up 1.0%. Whilst the preliminary release doesn’t provide a ton of detail—we will know more about expenditure data in the second release—starting next year, we won’t have this pickle. The ONS announced there will be two quarterly estimates of GDP rather than the current three. The “preliminary” estimate will be pushed back two weeks whilst the second estimate will come out sooner, and the preliminary will finally have expenditure data. To make up for the longer wait, the ONS will add a monthly GDP estimate starting in July 2018 (which will report May data).
Across the Channel, eurozone GDP grew for an 18th straight quarter, up 0.6% q/q in Q3 (2.4% annualised) from Q2’s 0.7%. Like the UK, we don’t have much data colour here—Austria, Belgium, France and Spain have thus far reported Q3 growth—but it adds further evidence of the eurozone’s long-running expansion.
Several Asian economies also released growthy GDP reports. China grew 6.8% y/y in Q3, in line with expectations. The data were released during the 19th Party Congress—China’s biggest political event—so some voiced doubts about the numbers’ accuracy (a long-running media gripe). Though these doubts are understandable, we don’t believe Chinese growth is significantly weaker than official numbers suggest. Data from China’s trade partners show economic activity in the country hasn’t plunged off a cliff, so whilst the specific figures deserve scepticism (as any data from any country would, given the impossibility of measuring economic activity precisely), China probably isn’t tanking. More importantly, growth remains in the government’s target range. We don’t anticipate big, unexpected changes for the foreseeable future, even following the conclusion of the Party Congress. The government’s primary focus is social stability, and that means supporting economic growth as necessary.
In Korea, GDP sped up from Q2’s 2.7% y/y to 3.6% in Q3. Strong exports drove a 1.4% q/q growth rate, the fastest since Q2 2010. Regional tensions haven’t stopped South Korea from enjoying robust economic growth and strong equity market performance this year. If a hot war was a probable threat, Korean equities—which have the most to lose—probably wouldn’t be up more than 46% year to date.[ii] Though tourism has been down, this isn’t all directly related to Pyongyang’s sabre-rattling. South Korea has been in a flap with China over the former hosting a US missile defence system, and Chinese tourism to Korea has dried up. However, this looks temporary and has already started rebounding.
Elsewhere in Asia, Taiwanese GDP grew 3.1% y/y in Q3, up from Q2’s 2.1%. Whilst domestic demand was solid—private consumption rose 1.9% and imports accelerated to 6.5%—exports drove growth, jumping from 5.0% in Q2 to 11.2% in Q3 thanks to strong demand for electronic components. Indonesia, Southeast Asia’s largest economy, announced GDP grew 5.1% y/y, slightly higher than Q2’s 5.0%. Household consumption rose 4.9% y/y, repeating Q2’s growth rate, and analysts credited a rebound in commodity prices for the pickup in trade. Exports rose 17.3% y/y whilst imports picked up 15.1%—major jumps from Q2’s respective 3.4% and 0.5% figures, although the magnitude of the jump could be skewed by the timing of the autumn festival. Either way, though, the broader trade trend is growth.
The numbers covering July – September don't tell you about future growth, but other indicators—like The Conference Board’s Leading Economic Indexes—suggests global expansion isn’t in danger of ceasing any time soon. Overall, the economic drivers underpinning this bull market remain positive—which is one reason we remain bullish about the foreseeable future.
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