The Global Economy
With Q1 GDP reports from the world’s two largest economies, the US and China, failing to reach expectations, together with a second month of generally disappointing forward-looking PMIs, it is understandable that the economic debate has gravitated towards fears of another spring swoon for the global economy. While acknowledging downside risks to quarterly global growth forecasts, in general, commentators expect a strong recovery in the developing economies to boost Q2 growth to around a 3.4% per annum pace from 2¾% in Q1. As for the balance of the year, a continuing improvement in financial conditions should set the stage for a second half acceleration to at least trend growth. The table below shows the latest consensus estimates from a number of the leading investment houses.
The US Economy
Although headline US Q1 GDP grew at a 2.5% quarter-on-quarter rate, compared to just 0.4% in Q4, adjusting for temporary distortions and one-off items revealed a more pedestrian advance with final domestic demand growing at a 1.9% average pace over the past two quarters. To a large extent, this modest growth rate reflects the scale of government cutbacks that have averaged -5.7% over Q4 and Q1, whereas private sector domestic demand (consumer and corporate spending and housing) grew at a very decent 3.5% clip.
Looking forward, government cutbacks will remain a drag on US growth for much of the year and lead indicators suggest it may be difficult for the private sector to sustain a growth rate in excess of 3% over the next quarter or two. Q2 headline GDP is expected to slip to around 1.5% and to 1.9% for the full year. This pace of growth suggests no early end to QE.
The Eurozone
The euro area has yet to announce the first estimate of Q1 GDP but most commentators expect a sixth consecutive quarterly decline and the recession to continue through Q2. Most worrying are the growing signs of a downturn in the core countries exemplified by weaker German and French PMIs and survey data. Domestic demand in core EU is weakening rather than offsetting periphery recession and the timing of any recovery continues to be extended out into the future.
The ongoing recession requires not only further ECB policy easing on top of the recent 25bp rate cut to 0.5%, but also action by other EU institutions, while many EU governments are shifting away from austerity-first agendas. Hopefully, Q2 will mark the low of the euro area economy but, with only modest monetary and fiscal policy changes anticipated, anything other than a weak recovery appears unlikely.
The UK Economy
The UK avoided a triple dip recession and indeed, with revisions to past data, the prior double dip is also expected to disappear from the record books. At 0.3% q/q (not annualised), Q1 GDP growth was above forecasts and, if taken at face value, suggests a slight improvement in the economy. Indeed, recent data has confirmed a more upbeat picture and some commentators have added a tenth or so to growth forecasts. The MPC is less likely, therefore, to alter monetary policy ahead of Mr. Carney becoming the new BOE governor on 1st July.
The Japanese Economy
The intention of “Abenomics” in Japan is to pursue faster growth and sound financial management through a policy mix of very accommodative monetary policy, flexible fiscal policy and a growth strategy encompassing structural reform. Certainly, the new BOJ governor Mr. Kuroda has delivered a monetary revolution, the government boosted public spending and details of structural reform are expected over the summer.
The effects of these policies are much as hoped, generating rapid and sizeable yen depreciation, a surging stock market and upward revisions to GDP forecasts. This is a highly ambitious programme, however, with very challenging targets and some considerable risks attached. But, so far so good.
The Chinese Economy
A disappointing Q1 GDP report, with growth of 7.7% y/y, has been followed by recent data suggesting a modest weakening in China’s rate of growth. This has resulted in some downward revisions to growth forecasts, most of which are now a little below 8.0%. With Q1 affected by weaker retail sales, in the wake of the government’s corruption crackdown, however, the underlying trend is difficult to divine, although continued strong credit growth should prevent the economy slipping much further.
