Private sector recovery still on track

Allister Heath
WHAT a day for the global economy. In Britain, China and America, manufacturing surveys surged ahead,

in every case beating consensus estimates and suggesting strong private sector growth over the next few months. Yesterday’s jump in the global purchasing managers indices were undoubtedly the most bullish indicator I have seen in a long time.

The key here is world trade and globalisation: domestic demand in the UK and in the US may be weak, with more realistic credit, falling real incomes and sliding house prices – but the emerging world is booming like never before. One must hope that this can be sustained, helping to rebalance Western economies away from debt-fuelled public and private consumption and towards greater exports of goods and services.

Research from Ian Stewart of Deloitte confirms that the broader corporate recovery is also proceeding apace across the industrialised world. During the last month, 238 large companies from rich nations reported third quarter results. These include 214 from the S&P 500, 17 from the FTSE 350 and seven from the Euro Stoxx 50. Deloitte’s analysis shows a strong rise in profits. Over the last year, earnings at S&P 500 firms reporting results in the third quarter have risen 41 per cent. Earnings at FTSE 350 firms rose 29 per cent. Euro Stoxx 600 index earnings rose 31 per cent.

No fewer than 79 per cent of third quarter results exceeded expectations. As a result, the average earnings-per-share analysts’ estimate for the S&P 500 have risen 26 per cent. Those for the FTSE 350 are up 65 per cent and for the Euro Stoxx 50 by 18 per cent.

Technology firms are doing well. Even airlines are recovering: Ryanair posted strong earnings, BA is back in profit, while Bank of America Merrill Lynch estimates US airlines earned record amounts in the third quarter (though the impact of yesterday’s new security measures in the UK remain to be seen). In contrast, US banks have reported a significant fall in revenues; the repossessions scandal will continue to drag them down.

There are three ways these buoyant profits will be spent globally: an increase in stock buybacks, higher dividends and more capital spending. The latter will help drive GDP growth and ensure that the squeeze on consumer and government demand won’t tip the UK into a double-dip.

Tim Congdon, who runs International Monetary Research, is another economist who has become more optimistic. He argues that the latest money numbers from the US suggest that the case for another round of quantitative easing (QE) – which he thought was obvious for most of 2009 and early 2010 – is now far from clear-cut. QE’s job is to increase the quantity of money in the hope that this boosts the demand for goods, services and assets. Yet Congdon notes that the M2 money measure has grown in the last three months at an annualised rate of 8 per cent, while the more important M3 measure is also creeping up.

If QE2 sees the Fed buy $500bn of long-dated Treasuries from non-banks, this would expand the quantity of money directly by only 2 – 3 per cent maximum. We shall see – but it does seem strange that the US authorities are planning to jump on the QE2 just as some key indicators are improving of their own accord. Let us hope that, just as large chunks of the private sector start to recover, the authorities don’t mess it all up again.