By coincidence or not, the sudden downturn in global risk appetite fits our short-term forecast for Global Industrial Production momentum, which we expect to fall from around 4% per annum to around 1% per annum between June and October. Except that the risk asset sell-off has taken place at warp speed and perhaps already overshot on the downside. Figure 1.
Normally, IP momentum is highly correlated with corporate earnings revisions, which is one reason that we constantly monitor the IP data and update our short-term projections. And over the past few weeks, global net upwards earnings revisions have indeed ticked downwards, in line with our projected down shift in momentum during July and August.
The "downturn" in earnings revisions is visible in both the US and Europe but they remain at above average levels. Both China and Japan were moving higher until just recently, but China might be rolling over already, and the sudden appreciation of the yen will send Japan's net upward revisions into reverse (while benefitting competing countries such as Korea and Taiwan) .
Despite the summer dip in momentum, nothing yet points to a collapse of the type seen in the GFC (or indeed COVID). Real disposable income is growing in most regions, corporate profits are generally high, and there is no generalised credit crunch. So, we don't have any of the classic warning signs normally present ahead of a recession. Instead, we have a pattern of fairly slow but steady growth in global IP that has been going on for years now. Figure 4.
So, our default assumption is that global IP momentum will pick up somewhat in Q4, as shown in charts 1 and 4. Especially if central banks get the memo that it's time to start getting rates down to more neutral levels.
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