Prior optimism that the global economy would return to sustainable above trend growth has continued to fade as idiosyncratic features in regional blocks hamper the recovery. Indeed, new waves of central bank support are being implemented in China and Europe and will most likely be required later this year or early next in Japan.
Even so, global growth should grow far faster in the second half than the first principally because of the upturn in the US economy which, once again, is burdened with being the main contributor to global growth.
With hopes for an acceleration in world economic activity now essentially being shouldered by the US, it is just as well that recent data suggests it up to the task, at least through year end. Not that the US is on a tear, most figures indicate fairly strong, steady growth with private sector final domestic demand growing at a slightly slower pace than in Q2 at around 3 to 3.5% per year, the higher end sufficient to contribute approximately 3 percentage points (pp) to aggregate GDP.
Data from the consumer and corporate sectors signalled both continued to spend during the quarter with key figures such as retail sales, auto sales and capital goods shipments all rising well above Q2 averages through August. Job gains and consumer and business surveys have also suggested that these general trends continued through September while the latest PMIs point to further progress in Q4, despite some softening. One drawback is the strength of the dollar over the past three months which JP Morgan note could “take about 0.3% to 0.4% off of annualised growth over the next six months and over the next year”.
At this stage GDP growth forecasts for Q3 and Q4 remain around 3% which would take the full year figure to around 2.2%. As for 2015, the consensus estimate remained unchanged at 3%.
Economic news from the euro area continued to disappoint following near stagnation in Q2. This is not meant to imply that the region will return to recession in Q3, rather than the expected gradual transition to stronger growth is taking longer to arrive than expected, resulting in GDP forecasts for Q3 and Q4 being revised lower once again.
Essentially flat Q2 GDP may have overstated economic weakness but, with a number of disappointing German data reports and surveys and French and Italian PMIs falling below 50, underlying growth is unlikely to exceed a 1% p.a. rate in Q3.
Europe is lagging the manufacturing cycle but, with the trade weighted euro having fallen markedly in recent months, most commentators still predict a slow, gradual pick up over the second half and through next year. Many now expect the ECB to directly purchase government bonds within the next six months.
While Q3 and Q4 forecasts were generally revised downwards to around a 1% p.a. rate and 1.2% respectively, full year 2014 estimates were essentially unchanged at 0.8%. The consensus estimate for 2015, however, declined to 1.4% from 1.6%.
The ONS has undertaken a thorough revision of past UK economic data. Underneath the headlines the figures show that contrary to earlier reports domestic demand has driven the recovery, with net trade providing no contribution. For much of the recovery period the data showed virtually no help from capex but the revisions now reveal that GDP was boosted by a substantial rebound in business spending.
Following a weak summer period during which economic surprises in Japan were almost universally negative, the autumn brought one or two upward surprises, but generally, the data was very poor. Despite Bank of Japan governor Kuroda’s seemingly continued blind optimism, September witnessed a roster of disappointing economic reports from household spending to industrial production as well as new orders and other forward looking indicators. Unsurprisingly, forecasts for both Q3 and Q4 eased again over the month and the full year estimate was revised down by two tenths to 0.9%.
Economic data releases in China, while perhaps not as monotonously disappointing as in Japan, were no less discomforting, failing to indicate a rebound will be underway in Q4 from what is looking like a substantial slowdown in Q3.
Forecasts are easing back towards 7% annual growth rate and would follow growth of approximately 8% in Q2. The authorities worked hard to stimulate the economy in Q2 but fiscal outlays, credit data and the latest PMIs suggest a much slower pace in manufacturing activity. Risks to growth appear to the downside and further accommodative monetary as well as fiscal policies will be required to achieve what look like increasingly untenable government growth forecasts.
Full year estimates from a number of commentators were lowered both for this year and next, the current consensus is now for growth of 7.3% and 7.1 % respectively. Longer term, GDP growth will continue to trend lower, it is really just a question of how swiftly it occurs.
A world of desynchronised growth and a slower than projected economic outlook in China are important risks to Asia Pacific countries. In general, however, US optimism remains intact and much of Asia benefits from the upturn. Higher US capital equipment and communication spending should feed through to much of emerging market Asia, while the recent deceleration in inflation will provide a boost to consumers’ purchasing power.
Within Latin America, Mexican GDP growth should be sustained around 4% with US import demand a significant contributor, while even Brazil is showing signs of gradually emerging from recession. Latest economic forecasts show a much stronger trajectory for the whole region from Q3 onwards.
