This article first appeared in Forum, The Edge Malaysia Weekly, on March 21 - 27, 2016.

The pessimism about global economic prospects continues. Last week, there was yet another warning from the International Monetary Fund about the possible downside risks to global growth. In fact, IMF believes these risks have grown since it downgraded its growth forecasts for 2016 in January. It is concerned that more volatile financial markets and even lower commodity prices since then had created fresh risks to the health of the global economy. IMF is not alone in worrying about growing headwinds to the world economy, as many other commentators have expressed similar concerns. Meanwhile, anxiety over deflationary pressures around the world has continued.

It is certainly not difficult to find reasons to worry, given the political hotspots around the world and the economic imbalances in some key countries. Moreover, the Organisation for Economic Co-operation and Development (OECD) lead indicator for growth in the developed economies has been edging down. These negatives have been well documented.

But what has not received sufficient attention are the incipient signs of a turnaround in both growth and inflation. In our view, the surprises to the world economy could well be upside ones, if these incipient signs are reinforced in coming weeks. And what is really interesting is that several of these turning points are particularly beneficial to our region’s export prospects.

First, is a turnaround in technology spending in the offing?

The US Federal Reserve’s Tech Pulse Index surged 10.1% y-o-y to 87.5 in February: This is its fastest growth since August 2010 and the index’s highest level since May 2008. With the steady improvement in the index over the past 1½ years now turning into a much faster pace, there is a growing likelihood of a rebound in overall technology spending.

In addition, the Semiconductor Equipment and Materials International (SEMI) book-to-bill ratio increased to 1.08 in January, up from 1 last December, indicating that bookings, or new orders, exceeded billings, or shipments, for the first time since last September. Clearly, demand for semiconductor equipment has started the year strongly: We believe this is another harbinger of an upturn in the technology spending cycle.

This is exactly the ingredient in the global recovery that has been missing. With Asian-manufactured exports heavily skewed towards electronic components of various kinds, such a rebound would be substantially

positive for the region’s exports. Asian-manufactured exports have been found to be strongly correlated with capital spending in developed economies, especially spending on technology.

Second, there are indications that manufacturing in the US, Europe and Japan could be bottoming out

•     The US ISM manufacturing PMI was 49.5 in February, up from 48.2 in January. More importantly, new orders were at their highest level since last August. The Fed’s most recent Beige Book survey found that manufacturers were becoming more optimistic;

•     Eurozone industrial production seems to be turning up. Eurozone industrial output rose 2.8% y-o-y in January, up from a fall of 0.1% y-o-y last December. Even in France, whose recovery had been lagging, industrial production was up 2% y-o-y in January. Its manufacturing sector enjoyed its strongest growth since last August, with production rising 0.8% m-o-m;

•     UK industrial production also rose strongly in January after falling in each of the past two months — this rebound is unfolding even as drops in oil and gas extraction exerted a strong drag on overall production, suggesting that other segments of manufacturing are strengthening nicely; and

•     Japan’s core machinery orders rose 15% m-o-m in January, up from a revised 1% m-o-m increase last December, suggesting capital spending is likely to pick up. Manufacturing orders increased 41.2% m-o-m in January, sharply up from a 3% m-o-m decline last December.

The signs of a manufacturing recovery coincide with other positive signs. For example, in the US, the ISM non-manufacturing index saw new import orders leaping from 46 to 55.5 in February, for the first time since last November. Such a strong surge is suggestive of a powerful turnaround in economic activity.

Third, inflection point in impact of oil prices being reached

Some observers have worried that the fall in oil prices since late 2014 has not delivered as powerful a boost to global consumer and business spending as expected. The reason is that the losers from a sharp fall in oil prices — oil-exporting countries and oil-producing companies and their suppliers — tend to slash spending and hiring very quickly to conserve cash. But the beneficiaries — net oil-importing countries, energy-intensive companies and consumers — tend to wait to see whether the fall in oil prices is long-lasting. So, the benefits take time to flow through while the damage done by falling oil prices is relatively immediate.

Now, we are seeing some evidence that the inflexion point — where the upside from low oil prices starts to exceed the damage low oil prices causes — is being reached. Several airlines around the world have recently unveiled ambitious plans to expand capacity, for instance. As the financial turmoil at the start of the year fades from memory, we expect consumers to also start ramping up spending out of the savings they are making from low oil prices, especially in the US.

Fourth, we are likely to see an aggressive stepping-up of stimulus in China

In the course of the National People’s Congress meeting last week, political leaders set a high premium on achieving a floor economic growth rate of 6.5%. The reason for this is clear — President Xi Jinping had set a goal for the Chinese economy to become a modestly prosperous country by 2020. Based on the growth achieved so far, a minimum growth rate of 6.5% is needed to demonstrate to the Chinese people that the Communist Party of China and its leaders have delivered what they promised. Failure to achieve 6.5% is simply not an option in the eyes of the leadership.

Yet, the economic data released over the past week makes it clear that the stimulus measures already introduced are not yet producing results — and that this growth rate is at risk:

•     Industrial production grew 5.4% in January-February, the slowest pace in seven years;

•     Retail sales expanded 10.2% in January-February, worryingly slower than December’s 11.1%. Given how important it is for consumer spending to make up for weaknesses in exports and investment, this is a bad sign;

•     Fixed asset investment grew 10.2% in January-February, after expanding 10% in 2015. However, the quality of this growth in investment is suspect — with private sector investment rising just 6.9% and real estate investment picking up even though the sector’s overheating is one reason for China’s economic travails;

•     Exports have fallen precipitously, down 25.4% y-o-y in February from a decline of 11.5% in January. Testament to their lack of confidence in exports as a growth driver, policymakers declined to forecast export growth for 2016; and

•     Divergence between CPI and PPI points to a continued oversupply in upstream industries. CPI jumped the most in 20 months, rising 2.3% y-o-y in February, up from 1.8% in January. However, PPI continued to languish in negative territory, falling 4.9% y-o-y in February compared with a fall of 5.3% in January.

This means that Chinese policymakers will have little choice but to act much more aggressively to ensure that GDP growth does not fall below their floor rate.

If we are right in our argument that Chinese policymakers will aggressively ramp up monetary and fiscal stimulus, we could well see a further rise in demand for commodities as well as intermediate components and capital equipment, which would add to the turnaround.

Fifth, global deflationary pressures could be easing

In OECD, consumer price inflation rose to a 1.2% annualised rate in January from 0.9% in December. While this is still far from the 2% that many a central banker regards as optimal, it still marks a shift in trend away from the constant downward surprises in inflation that we have been seeing for a year. In fact, the core inflation rate of 1.9% excluding volatile food and energy is close to this 2% target.

In the US, this shift towards reduced concerns over deflation may already be taking place. The New York Federal Reserve Bank’s Survey of Consumer Expectations in February depicted an increase in inflation expectations. Interestingly, Fed vice-chairman Stanley Fischer appears to concur, observing recently that “we may well at present be seeing the first stirrings of an increase in the inflation rate, something that we would like to happen”.

Thus, it seems that worries over a descent into some kind of global deflation trap have been exaggerated. With prices of oil and several commodities turning up, we should see a modestly higher rate of inflation across the developed world, one more consistent with a healthy global economy.

Bottom line: This is not the time to be overly pessimistic

In short, we believe it would be a huge mistake to be overly negative about global economic prospects. The likelihood is that global economic activity will accelerate modestly in most parts of the world outside China and some of the large emerging economies that have mismanaged policies.

Manu Bhaskaran is a partner and head of economic research at Centennial Group Inc, an economics consultancy

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