Along with the US, manufacturing activity is expanding in key economies, including China, India and Japan; for much of the rest of the world it is rapidly contracting. As a whole, global manufacturing activity can be viewed in the chart above courtesy of Ned Davis Research. The Global Manufacturing Purchasing Managers Index is at 50, the border between expansion and contraction (top panel). Judging by the PMI data, Europe is already in recession, whereas the US is merely growing slowly. The key to 2012 growth lies with the developing world and especially with China, in our view. We think China is becoming less concerned about inflation. If we are correct and China starts to promote growth again, then the global PMI indicators should pick up somewhat from here.

David Fuller's view I think we can conclude that China is already moderating its tightening bias. However, we are very unlikely to see anything like China's late-2008 to early-2009 monetary stimulus, for two reasons:

1) China is likely be far less concerned about risks to the global economy in 2011-2012 than in 2008-2009, despite Europe's severe difficulties; 2) However, while China will be relieved to see some moderation in its inflation, particularly regarding property prices, it will remain very concerned about the risk of commodity price inflation over which it has far less control.

The key commodities of concern to China and most other countries are crude oil and staple foods such as corn, soybeans, rough rice and pork. If / when Brent crude oil spikes another $20 or more, global GDP growth will be further jeopardised. Food prices are mostly lower today than a year ago but better luck is needed in terms of weather conditions in the world's key agricultural regions. Farmers have not had much luck with weather over the last two years.