We are approaching the middle of the year, and after a turbulent start, it feels as if the world economy is only just beginning to get going.
Most obviously in the first quarter, US economic growth was weak, with an annualised growth contraction of — 0.7 per cent. But elsewhere there were signs of softness as well – in the United Kingdom, where growth was half the pace of the previous quarter, and in China where momentum also slackened.
Regionally, the oil price decline in January probably also affected sentiment, despite the best efforts of policymakers to reassure that government spending would continue regardless.
Thankfully, the signs this quarter are that the worst is hopefully behind us. In the US, we have already been told by Janet Yellen that the first-quarter weakness was transitory and would be followed by a rebound in GDP growth, setting the stage for policy lift-off in the second half.
Even after the weather effect and the distortions caused by port strikes and reduced oil production, so far the evidence this quarter is that momentum is picking up. Not only did jobs growth recover last month, but for the first time in months there were other positive surprises, including for core capital goods orders, auguring well for second-quarter growth.
China, which had weaker growth in the first quarter at 7 per cent, has also shown some hopeful signs of stabilisation at the start of this quarter, with last month’s industrial production rebounding modestly and house price declines slowing. This was offset, however, by ongoing weak PMI activity and soft retail sales. But with the authorities maintaining their efforts to stimulate growth by cutting interest rates, along with other stimulus measures, there are at least some grounds for encouragement that things may not be so bleak.
Elsewhere, there have even been more outright reasons for optimism from the serial growth laggards of the euro zone and Japan. In both cases growth accelerated by more than expected in the first quarter, up by 1.6 per cent and 2.4 per cent, respectively, on an annualised basis. In the euro zone’s case, its first-quarter quarterly growth rate of 0.4 per cent was actually held back by Germany, rather than getting its usual boost, with some of the smaller eurozone economies taking up the slack for once.
In fact, the euro zone’s bounce back should not be that much of a surprise, as its economy was perhaps the best placed to benefit from the combined stimulus of quantitative easing, a cheap euro and low oil prices.
These grounds for optimism are still couched with risks, most notably related to Greece. With time running out for a deal that will let Greece avoid a default, there is an increasing chance that the talks will fail, plunging the region back into a period of introspection and uncertainty.
In Japan’s case, there are probably greater grounds for optimism that the economy is turning a corner after the growth slump related to last year’s value-added tax rise. In some ways the surprise was that the downturn lasted as long as it did, extending all the way until the end of last year. Even more encouraging than the 0.6 per cent quarter-on-quarter growth in the beginning of the year have been the signs that momentum is being carried over into this quarter, with monthly data through March on consumption and machinery orders providing greater confidence about future activity. With more stimulus measures probably in the wings, the outlook remains favourable that the recovery will be sustained.
The UK has also managed to navigate its general election risks relatively successfully, which should allow the British economy to move on more confidently in the second half of the year.
The election result provides greater certainty about the outlook for fiscal policy as well as for the overall business environment, allowing the economy to benefit from the growth elsewhere, especially in its key eurozone trading partners.
Regionally, the most powerful indicator of stabilisation is the recovery in the oil price. This began in mid-March, but has sustained itself longer than might have been expected in the face of plentiful global supply and a strong dollar.
Tim Fox is the head of research and chief economist at Emirates NBD.
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