Global economic growth stumbled in May. What does it imply for the gold market?
The JPMorgan Global PMI fell from 51.6 in April to 51.1 in May, the second-lowest reading since the end of 2012. It means that the global economy continued its subdued start to the year. The rates of growth in all industry output and new orders in 2016 have been among the weakest in the last three years so far. The weak expansion resulted from the stagnation in manufacturing production and the slowest activity in the service sector in three months.
Broken down by region, emerging markets once again led the slowdown, as they contracted slightly, while developed economies slowed to the second-lowest in just over three years. Importantly, the U.S. economy was not immune to sluggish growth. The final Markit U.S. Composite PMI Output Index dropped from 52.4 in April to 50.9 in May. The decline was caused by a slight contraction in manufacturing production and slower activity of service providers. The final Markit U.S. Services Business Activity Index declined from 52.8 in April to 51.3 in May. Although it signaled a further expansion, the reading was only marginally above the 50.0 threshold. Actually, the service sector reported one of the weakest expansions since the recession. And what is also worrisome is that the degree of optimism about the business outlook plunged to a new post-crisis low.
A similar service index from the Institute for Supply Management also dropped from 55.7 percent in April to 52.9 percent in May, the slowest pace since February 2014. The data showing weakness in services followed a terrible May job report and it undermines the confidence that the payroll report will rebound soon. The service sector has been so far the bright side of the U.S. economy – now (although it is still expanding) it shows surprising weakness.
Summing up, the global economy is slowing down. The U.S. economy is no exception here. The weakness in the service sector casts doubts on the economic rebound in the second quarter. It goes without saying that sluggish economic growth in the world and in the U.S. economy is music to gold bulls’ ears, as the shiny metal usually shines in such an environment.
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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.
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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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