JANE FOLEY RESEARCH DIRECTOR, FOREX.COM<br /><br />STRONG earnings reports from both Goldman Sachs and Intel and an improvement in some economic data releases last week partially cleared the cloud of economic gloom that has been hanging over the global recovery. The particularly strong gains in Asia finally added some substance to the belief that the global economy could have begun to repair after all. <br /><br />What was staggering was just how good the Asian growth data was. China posted growth of 7.9 per cent year-on-year in the second quarter, and even more astonishingly, Singapore delivered a staggering 20.4 per cent growth in the second quarter. While it was accompanied by a warning that the increase was partly down to inventory adjustment, it is still strong. <br /><br />South Korea will be reporting second quarter GDP this week and optimism surrounding the release is rising, not least because recent data showed that exports fell at their slowest pace for eight months in June – more robust than had been expected. South Korea’s trade minister now forecasts they will return to growth in October. Investors have not been ignoring the positive economic data from Asia, if the 75 per cent rises year-to-date in the Shanghai composite and India’s equity index are anything to go by. <br /><br />But while investors are more optimistic about emerging market Asia, there is a significant caveat to this good Asian data. In general, the region’s economic growth has been supported by large domestic fiscal stimulus packages, while exports remain lacklustre. In order to sustain the upward trajectory in growth forecasts demand from the US and other major economies must kick in. There are no guarantees that this will happen this year.<br /><br /><strong>BUMPY PERIOD<br /></strong>But at present it seems likely that the best-case scenario for Western economies is that the coming months will be characterised by a bumpy period of stabilisation. Some encouraging news came in the form of May US industrial production data last week, which shrank by the smallest amount in eight months, strengthening the perception that the recovery could be under way by the end of the year. More positive news came from US retail sales, which posted better-than-expected 0.6 per cent month-on-month increase. This, however, was boosted by incentives linked to car sales, which imply the pace of gains may not be sustained. <br /><br />A weak housing market and high unemployment remain considerable constraints to a recovery in consumer demand in the US, as indeed they do in the UK. In the US, 9.5 per cent of the working population is now unemployed. The Federal Reserve last week increased its forecast for unemployment this year to 10 per cent and to make matters worse, last week brought news of a record 1.5m home foreclosures in the first half of the year, equivalent to one in eighty-four US households receiving a default or auction notice or having their home seized by the bank. This environment implies that households are more likely to have an increased propensity to save rather than spend extra income coming from government of central bank stimulus and this implies a less efficient reaction to this year’s huge stimulus plans. This will not be welcome news for Asian countries looking to boost exports in the coming months.<br /><br /><strong>AGGRESSIVE STIMULUS<br /></strong>Most governments and central banks have embarked on aggressive stimulus this year. At present there is no way to be sure exactly how successful either fiscal or monetary policy incentives have been or indeed how much more impact is yet to be recorded. While governments and central banks are in general acknowledging that there are some signs that this year’s huge amounts of stimulus are beginning to have an effect, improvements are at best tentative. It is likely that the impact of these measures will take months to work through the system and in the meantime policymakers must remain cautious.<br /><br />It is possible that no extension of current stimulus plans will be seen in the US, UK or in the Eurozone, but signs of strength in economic data are so far insufficient to alter the view that there is a greater risk of more incentives this year than a retraction of stimulus policies. <br /><br />The sharp gains in some emerging market stock indices suggests that hot money has been flowing again but until economic data confirms stabilisation in the US, the market should remain cautious about extending risk. A cautious outlook suggests that the US dollar and the yen will continue to find support. For sterling, wariness about the prospects for economic recovery suggests that scope for near-term gains could be tempered.