Despite some weaker data points in the EU and China, the past few months have delivered a pleasant growth surprise with global gross domestic product (GDP) appearing to have recovered towards a trend-like pace. A pick up in manufacturing output, specifically in the US and Asia (excluding China), has led the way although part of the rebound is attributable to temporary factors such as mild winter weather in the US and recovery from the Thai floods in Asia. Some loss of economic momentum can be expected in Q2, therefore, but most commentators believe the global economy bottomed in Q4 last year and a gradual acceleration is expected as the year progresses. This is true for both the developed economies and Asia although any improvement in China may take longer to appear.
The latest GDP forecasts for the main economies are shown below:
Both the EU and China, of course, are experiencing the self-inflicted effects of a policy induced downturn and slowdown respectively. The impact of fiscal austerity is being felt throughout the EU but particularly in Southern Europe. Spain is back in the firing line with a new budget approved but financial markets questioning once again the efficacy of such tough measures that can only push the Spanish economy into even deeper recession. This led to Spanish bond yields rising sharply over the month undermining some of the recent LTRO-inspired support. The news of an extension to the EU “firewall” funds to EUR 700 billion was somewhat less than generally hoped for and may limit other countries’ commitments to further IMF support for the EU. Overall, a mild regional recession is still forecast with a significant contraction in the periphery offset by greater strength in the core, particularly Germany.
In contrast, Chinese authorities have tightened monetary policy to lower inflation as well as rein in an overheating property market and a local government lending boom. Policymakers have shown only limited signs of easing conditions so far and there is still considerable debate over an economic outlook clouded by the Lunar New Year. Recent data has yet to clear the fog with the two PMI’s showing opposing trends but most commentators believe an economic deceleration, not collapse, is on track to bottom out in Q2.
Policymakers in the US, Japan and the UK have all turned to monetary stimulus to strengthen their economies and, while this has certainly provided support, the key difference between expected near trend growth in the US and a virtually stagnant UK economy, is that the latter embarked on an onerous fiscal tightening programme (unchanged in the budget) that, along with high levels of policy-induced inflation, combined to severely squeeze real household incomes. Over the balance of the year most commentators expect economic conditions to gradually improve in the UK and, hopefully for the US economy to transition from the recovery phase to a self-sustaining expansion. Whether this could be maintained through next year, as the US begins to tackle its huge budget deficit, however, will be one of the key debating points later this year.
Along with other parts of Asia (excluding China), Japanese data remains upbeat with most forecasters revising GDP estimates higher on stronger domestic demand. Momentum appears to be carrying over into Q2 with PMI’s continuing to strengthen.
Worries over the rising oil price eased somewhat with the Brent crude price stalling at around $125/barrel but, as ever, financial markets latched on to the mid-month jump in bond yields as another factor that could potentially undermine economic growth and destabilise risk markets. The rise in yields was only partially sustained in the US, however, and reversed in the UK and Germany. Current ten-year yields are still not far above 2.0% and will need to rise by at least a full 1% before becoming a more significant issue.
For much of March many of the improving trends that had driven stockmarkets higher in the prior two months continued to attract investors to equities. As the month drew to a close, however, a number of markets began to run out of steam as growth disappointments (China and the EU) and rising bond yields prompted profit taking in some of the highly successful reflation trades, including commodities and emerging markets' currencies.
Interestingly, there was far greater variability in equity returns over the month although, to a large extent, this reflected index composition and structure rather than greater divergence in recent economic trends. The US, for example, outperformed principally as a result of successful bank stress tests and the continuing surge in tech stocks (21% year to date), specifically Apple (50% year to date), the world’s largest company by market capitalisation.
