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Global Economics Weekly
Issue No: 11/21 June 8, 2011
Goldman Sachs Global Economics, Commodities and Strategy Research at https://360.gs.com

Anatomy of the Global Slowdown
Dominic Wilson dominic.wilson@gs.com +1 212 902 5924 Kamakshya Trivedi Kamakshya.Trivedi@gs.com +44 (0) 7051 4005 Constantin Burgi constantin.burgi@gs.com +44 (0)20 7051 4009 Stacy Carlson stacy.carlson@gs.com +1 212 8550684

Over the past few weeks, the dominant theme in markets has been a significant and persistent slowing in US and, to a degree, global growth. Markets have responded to the softening growth news, with bond yields heading s h a r p l y l o we r , c y c l i c a l e q u i t i e s underperforming substantially and most equity indices well off their peaks. Arguably, the most important assessmentnow is to judge the sources of that slowdown and how much the current news represents a temporary ‘air pocket’ (attributable to the recent oil spike, Japanese supply disruptions or mean reversion in the data) and how much it is a sign that underlying growth is weaker than we thought. Here we take a cold, hard look at the recent global data for clues on these fronts. Undertaking this exercisereveals significant gaps in what can be explained with much confidence. It suggests that both oil prices and Japanese supply chain shocks have played a meaningful role, and that some of the decline in global industrial data may represent ‘payback’ for a surprisingly strong first quarter. As some of these temporary pressures reverse—and there are tentative signs that this is beginning to happen—we shoulddiscover that some of the recent weakness has been overstated. And with financial conditions having eased significantly since the data deterioration began, any positive data surprise is better placed to be rewarded than before. Most ways of accounting for those temporary factors, however, suggest that underlying US growth may be softer than we thought at the start of the year, although it is lessclear at present that the same is true elsewhere around the world. So, the implications for markets may be more focused on relative US weakness than on the sharp global slowdown that remains central to many investors’ concerns.

Index pts

The Pattern of PMI Falls Loosely Matches Index pts with an Oil Price Shock
PMI change since Feb. 3 month PMI hit from peak (estimated in response to 20%rise in oil prices) 4 2 0 -2 -4 -6 -8

4 2 0 -2 -4 -6 -8

Source: GS Global ECS Reearch

Japanese Manufacturers Expect a Sharp Index Rebound in Production (2005 = 100)
160
Manufacturing Transport Equipment ICT Equipment Electronic Parts/Devices

140

120

100

80

60

40

08

Source: METI

South Africa China India Taiwan Poland Norway Singapore Japan South Korea AustraliaBrazil Switzerland Euro-zone Russia Hungary Sweden US Turkey U.K.
09 10 11

-10

-10

F'casts

Important disclosures appear at the back of this document

Goldman Sachs Global Economics, Commodities and Strategy Research

Global Economics Weekly

Anatomy of the Global Slowdown
Over the past few weeks, the dominant theme in markets has been a significant and persistent slowing in USand, to a degree, global growth. Our major proprietary indicators of future activity, the Global Leading Indicator (GLI), and of current activity, including our US Current Activity Index (CAI), have clearly signalled that slowdown. Markets have responded to the softening growth news in many places: bond yields have headed sharply lower, cyclical equities have underperformed substantially and mostequity indices are well off their peaks. Arguably, the most important assessment across markets now is to judge the sources of that slowdown and how much the current news represents a temporary ‘air pocket’ (attributable to the recent oil spike, Japanese supply disruptions or mean reversion in the data) and how much it is a sign that underlying growth is weaker than we thought. We have already...