The batch of new year forecasts for the world economy have been almost uniformly positive this year, at least from economists in the financial markets. Only a few months ago, forecasters were talking of increasing risks of a double dip recession, but the surge in risk assets since the Federal Reserve announced QE2 in the autumn has swept away most of this pessimism. JP Morgan this week said simply that “strong global growth is baked in the cake”. Although nothing in economic forecasting is that certain, there is plenty of evidence in favour of the recent outbreak of optimism.
First, the most reliable and timely indicators of global economic activity have recovered strongly in recent months. Although QE2 may have helped somewhat in this regard, it is much more likely that the pause in the global economy was anyway about to end when the Fed took its expansionary decisions in the early autumn.
The first graph shows the average of all the main business survey readings (PMIs and the like) taken in the major economies each month, and compares these readings to the annualised growth in real GDP. The turnaround in the business survey readings in September is immediately clear. What seems to have happened is that the initial strength of the recovery from recession, driven by expansionary policy and the inventory cycle, ran out of steam, but then more durable sources of expansion took up the running. (One of the bigger positive surprises is that real consumers’ expenditure in the debt-strapped US economy seems to have risen by about 4 per cent in Q4.) This pattern is not unusual in a recovery phase in the global cycle – for example, something very similar happened in 2004-05.
For Q4 as a whole, business surveys are suggesting that real GDP growth in the G7 will be around 2.5 per cent, slightly higher than in Q3. But note also the strengthening pattern through the quarter. By December, business survey readings have been consistent with G7 growth in the region of 3-3.5 per cent, well above trend. With new orders rising relative to inventories, and leading indicators in general strengthening, the immediate outlook seems very promising.
So does this mean that all of the problems of 2008-09 have suddenly melted away? I very much doubt it. Private and public debt are still at very high levels in the US, Japan, and the peripheral economies of Europe. And the extraordinary policy settings which prevented the recession from becoming a depression have never been seen before, so there is no reliable road map for the exit strategy. But, for the time being, the cyclical forces which so often seem to surprise people at the end of recessionary periods have clearly gained the upper hand.
There may be one major exception to this general rule, and that is China. The second graph shows the monthly changes in business survey indicators for each of the main economies since August. 
A similar pattern of recovery in Q4 has been seen in all the developed economies (even Japan), but the Chinese PMI for December suddenly turned downwards. Is this just an temporary blip? It could turn out that way, but economic policy in that country has now turned contractionary in response to concerns about inflation and speculative activity in the property sector. The Chinese authorities seem determined to slow the rate of real GDP growth by a few percentage points in the first part of 2011, and they usually get what they want.
Surprisingly strong growth in the US, and surprisingly weak growth in China? I doubt if that state of affairs would last very long, because medium term trends definitely point in the opposite direction, as Martin Wolf argues in the FT today. But for the time being policy settings in the two economies are now clearly pointed in that direction. It could be the first surprise of 2011.
