CHARLOTTE, North Carolina (ICIS)–Inflation is
falling faster than expected across most
economies, leading to a turning point in
central banks’ two-year battle against surging
prices. This turning is now fueling
expectations that central banks could pivot to
cutting interest rates in 2024.
The economies of both China and Europe have
lost momentum. Falling oil and other commodity
prices are indicative of a sluggish global
economy.
China’s recovery has been hampered by its
property sector, high debt, high youth
unemployment and soft export markets. The
demographic profile is aging rapidly, which is
hindering consumer spending.
China’s manufacturing Purchasing Managers’
Index (PMI) hovers around breakeven levels and
2024 activity will likely be slower than in
2023. Other Asian PMIs have been mixed.
Euro Area manufacturing has been in contraction
for 17 months and Europe’s economy appears to
be in recession. Europe is also aging rapidly.
Turning to the Americas, the pattern is mixed.
The Manufacturing PMI for Canada remained in
contraction during November and Brazil
manufacturing also remains in contraction.
Mexico’s manufacturing has rebounded as the
nation’s manufacturing sector is being aided by
re-shoring.
US THE OUTLIER
The US
remains an outlier with Q3 economic growth well
above trend. Excess savings accumulated during
the pandemic are now depleted, and with low
consumer confidence, consumer spending appears
to be slowing.
The November ISM US Manufacturing PMI
registered 46.7, unchanged from October and the
13th month in contraction. Only two industries
out of 18 expanded. The weakness was
broad-based among manufacturing, with
production falling back into contraction. New
orders contracted and order backlogs fell even
further into contraction territory. The latter
two are good indicators of future activity.
Inventories contracted at a slower pace, which
could provide a floor for output.
The ISM US Services PMI eased 0.9 points to
53.6, a reading indicating slowing expansion.
The US “rolling” recession scenario continues
to play out but at a more moderated pace.
Consumer prices are further disinflating and
are now up 3.1% year on year. But looking at
three- and six-month annualized gains,
inflation is at a pace desired by the US
Federal Reserve.
Economists expect US inflation to average 4.2%
for 2023, down from 8.0% last year. Inflation
is expected to soften to 2.6% in 2024 and 2.3%
in 2025. Real interest rates are now at tight
levels and the consensus is for rate cuts in
2024. Wall Street seems to believe that six
quarter-point rate cuts are in order, but three
cuts are more probable.
HOUSING TO STABILIZE
US
homebuilder confidence remains in negative
territory. Housing activity peaked in Spring
2022 and has since declined. The latest housing
reports have been mixed. Housing starts were
1.55m in 2022 and 1.61m in 2021. The consensus
among economists is that housing starts will
fall to 1.40m for all of 2023 and 1.37m in
2024. A recovery should lead to 1.46m starts in
2025.
Demographic factors are supporting activity
during this cycle. There’s significant pent-up
demand for housing and a shortage of inventory.
Moreover, falling mortgage interest rates will
also support demand as evidenced by the
November housing report.
A stabilizing and eventually improving level of
housing activity will foster demand for
polyvinyl chloride (PVC) and polyurethanes, as
well as a wide variety of adhesives, sealants,
and coatings.
LIGHT VEHICLE SALES TO REMAIN
STEADY
US light vehicle sales
eased again in November and although
inventories have ticked up, they remain low.
After sales falling from 15.0m in 2021 to 13.7m
in 2022 due to semiconductor shortages, light
vehicle sales should improve to 15.4m units for
2023.
Economists see light vehicle sales of 15.2m in
2024, before improving in 2025. The latest
cyclical peak was 17.2m in 2018. Despite soft
economic fundamentals, pent-up demand could
provide some support for this market.
Our ICIS Leading Business Barometer (LBB) of
the US business cycle has provided a signal
consistent with recessionary conditions as the
rolling recession scenario continues to play
out in manufacturing and transportation, and to
a lesser extent in housing.
Services sectors, however, continue to expand
but are slowing. Recent readings show
stabilization in the LBB leading index which is
encouraging.
After US real GDP rose 5.8% in 2021 and slowed
to a 2.5% gain in 2022, economists expect a
2.4% gain for 2023. In 2024, economic growth is
expected to slow, averaging 1.1% for the year
before rebounding 1.5% in 2025.
COMMODITY
WEAKNESS
Looking overseas, recent
indicators show economic growth at a crawl and
commodity prices remaining weak. Much of the
softness is due to structural weakness in
China, a recession in Europe, and a cyclical
slowdown in the US.
Despite progress in European inflation, the
European Central Bank (ECB) is not as dovish as
the Fed. Should easing occur, Europe’s shallow
recession will then begin to recover. Our ICIS
LBB for the global business cycle has provided
a signal consistent with soft economic
conditions.
Global economic growth is expected to average
2.4% for 2023, a slowing from the 3.0% pace in
2022 and the 6.1% pace in 2021. In 2024, growth
is expected to average 2.3% and in 2025 improve
further to a 2.8% gain.
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