The global economic recovery remains on track – for now at least

Allister Heath

WHAT is going on in America? The US economy collapsed in the first quarter – and true to form, Wall Street’s reaction was to send share prices surging. The reason was neither callousness nor even a short-termist, self-interested calculation that bad news means looser money – much more positively, it was that everybody can see that the first three months of the year were just a blip.

Despite the poor US data, and a raft of worrying issues almost everywhere one looks, the global recovery nevertheless remains broadly on track, despite some wobbles and some laggards; the real challenges will come later when monetary policy begins to tighten in earnest.

The proximate cause of the US dip – which saw GDP slump by 0.25 per cent, or to use the US parlance, by an annualised one per cent in the first quarter – was bad weather. For once, this wasn’t an excuse: poor conditions did depress activity, and this was exacerbated by an unusual drag from inventories. Growth is likely to bounce back, which is why so many people are so relaxed about what at first sight might appear like a disastrous development for the world’s largest economy.

Markit’s latest PMI survey suggests that the US economy grew at its fastest rate for four years in May; US manufacturing is expanding at its strongest rate since February 2011, with services expanding at their fastest clip since March 2012. The official statistics also confirm a strong rebound, with no sign of a fresh recession. Retail sales grew by 1.5 per cent in April, their strongest monthly increase for four years. Durable goods orders are rising. As Capital Economics points out, US employment jumped by nearly 300,000 in April and jobless claims dropped to 300,000 last week. The consultancy expects second-quarter GDP growth to come in at close to 3.5 per cent, the equivalent of just over 0.8 per cent in UK terminology.

It will be a decent bounce-back – though it will still not be good enough to beat the UK economy, which is powering ahead. The latest British indicators are once again hugely positive; almost everything is going well in the UK, apart from the ever-looming threat from the over-priced housing market and the growing distortions caused by permanently low interest rates. America’s problem is different: not enough jobs have been created since the start of the recovery, and there are once again concerns about monetary conditions, exacerbated by the fact that bond yields are falling again. But the situation is far from catastrophic, and all of the world’s regions are now growing again.

Goldman Sachs expects the UK to expand by three per cent this year, with only two advanced economies – Sweden and New Zealand – doing fractionally better. It expects the US to grow by 2.5 per cent, Japan by 1.3 per cent and the Eurozone by one per cent, with the latter still dragged down by pathetic performances by France (0.7 per cent), Italy (0.3 per cent) and Spain (0.9 per cent). Germany will do decently at 2.3 per cent. The biggest disappointment is Japan – if Goldman’s forecasts are right, Abenomics will have proven to be a damp squib. China, by contrast, is expected to grow by 7.3 per cent; the figures are always notoriously hard to gauge, but these estimates confirm what one major company with huge operations in the country recently told me: the economy is doing better than many sceptics had feared, though of course there has been a massive misallocation of capital and a gargantuan build-up of bad debt.

In time, this will be a huge threat to the global economy. A more urgent challenge in the US and UK is what will happen when monetary policy is properly normalised. Unlike the Bank of England, the Fed is still engaging in QE, albeit at a diminishing rate; interest rates will probably rise next year in both countries. It is only then that we will find out just how robust the global economic recovery really is.
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