Hard data so far this year point to a global economy that is slowly getting back on its feet. However, the recovery remains hesitant and uneven. Several times since the onset of the crisis in 2008, expectations of a firming of growth have ended in disappointment. And the current conjuncture is no different. Forward-looking indicators, including business surveys, have strengthened over the past six months only to weaken again recently (figure 12).
Business confidence has improved, but remains weaker than conditions would suggest
Source: World Bank, Haver Analytics, Markit
While an important clue as to current and future developments, a pessimistic bias has crept into the relationship between Purchasing Manager’s Indexes (PMI) and actual output. Based on the historical relationship between industrial activity and the World Bank’s global PMI indicator (a weighted average of national and Markit PMI indicators), PMIs between 2010 and 2013 have been systematically about 3.0 points lower than they should have been.
While this pessimistic bias could be just a statistical artifact, it could also be an indicator of increased caution on the part of firms. Under this interpretation, firms having been disappointed by poor growth outcomes in the past may be skeptical of stronger growth now, and could be holding back on investment until they are sure that another slowing is not in the offing. Such behavior, may be self-fulfilling and could explain why despite improved conditions in financial markets, and the gradual accumulation of pent-up demand for consumer and investment durables, the recovery (especially in Europe) remains modest.