There have been only minor changes to global growth forecasts in the past month as, in general, economic news from the two main contributors to world output—China and the US—was much in line with expectations. Indeed, data from both supported hopes that a modest re-acceleration in activity is underway heading into Q4.
The US Economy
US GDP grew at an annual rate of 2.0% in Q3, a little ahead of expectations and well above the prior quarter, although the underlying pace of private sector domestic demand was little changed. Data during the month of October underlined the crosscurrents in the economy, however, as those areas relating to the consumer, namely retail sales and housing, appear on track for another decent quarter.
In contrast, the corporate sector continued to disappoint as businesses refrained from investing, presumably until a clearer outlook emerges from the likely implications of the elections and upcoming “fiscal cliff” battle. Core capital goods orders, for example, collapsed at a near-25% p.a. rate in Q3. The “fiscal cliff” is the chief concern of most forecasters, as the prospect of a 4% hit to GDP from fiscal consolidation would virtually ensure another recession. The hope is that rational argument will prevail and an agreement will limit fiscal drag to 1-2%, but the US political system appears dysfunctional at best, with deeply divided partisan views.
Economic Growth Elsewhere
The latest PMI surveys confirmed other recent positive readings in indicating that the Chinese economy is gaining momentum, including GDP, which revealed China’s economic growth accelerated in Q3 to an annual rate of almost 8%.
While unable to match that pace, UK GDP grew at just over a 4% annual rate in Q3. This was principally a result of the unwinding of one-off factors that had caused the economy to contract in Q2. More recent data are less impressive and underlying growth remains fairly stagnant in the UK. Even so, the scale of the upturn in the UK’s Q3 growth rate led to upward revisions to full year forecasts.
Elsewhere, the euro area remains in mild recession and, as yet, there are few signs of any real improvement in confidence from the easing of financial conditions.
The biggest surprise of late, however, was the scale of the downturn in the Japanese economy with at least a 3% contraction in Q3 and a further decline in Q4 now predicted. Falling industrial production, retail sales and a worsening trade deficit, linked principally to the auto industry (end of eco subsidies), a weak external environment and some impact from political disagreements with China all contributed.
One of the more interesting articles in the IMF’s recently published biannual World Economic Outlook document suggested that the fiscal multiplier, instead of being the 0.5 assumed when fiscal austerity plans were introduced, could actually have been in a 0.9-1.7 range. Although there is some controversy over the findings, it is likely to add considerably to the debate on the implications of future austerity programmes.
Most of the major central banks have kept policy unchanged throughout October, with the exception of the Bank of Japan, which for the second consecutive month expanded its asset purchase programme. The initiative was generally considered as likely to be ineffective with more extensive measures required to overcome deflation. In recent days, the Bank of England and the European Central Bank both put a halt to their quantitative easing programmes.
Performing Asset Classes
The main asset classes have had mixed fortunes recently. Although a number of riskier assets performed well and yields in all the main government bond markets rose in October, this was not a general “risk on” phase for financial markets. The MSCI World Equity index, for example, ended the month slightly lower, despite most regional stock markets rising. The US was a real laggard; a disappointing Q3 results season, substantial weakness in technology stocks (-7%) and concerns over the election and “fiscal cliff” all combined to result in significant US underperformance last month. While the US laboured, Chinese stocks, particularly those listed in Hong Kong, continued their sizeable rally; October’s 8% gain took the rise from recent lows to some 19%.
From a global sector perspective, the financials headed the tables once again last month but there were no real “defensive” versus “cyclical” trends. By far the worst performing sector was Telecoms across all the main regions.
Other risk assets had conflicting trends, with peripheral bonds enjoying equity-style returns and corporate bonds and emerging market debt once again producing strong gains. Commodities, by contrast, especially industrial metals, fell heavily following the spectacular returns recorded in September and despite improving Chinese economic data.
As for currencies, most of the major crosses traded in a narrow band, the yen being an exception. An economy back in recession, some huge losses from leading exporting companies and the largest ever monthly trade deficit are all testament to the difficulties posed by a strong yen. Indeed, the tide may have turned as the yen lost 2% against the dollar and 3% versus the euro over the month.
