This is the first of a series of (usually) weekend comments on what I have learned this week about the global economy and financial markets. It will not attempt to be comprehensive. It will simply give my interpretation of the news which strikes me as particularly important for global macro, both in the recent past and the near future. This week, there was a great deal of new evidence suggesting that the global upswing is gathering powerful momentum as the year begins, especially in the US. But the problems of the eurozone periphery show no sign of ending. Rising food prices are becoming a severe headache. And the Aussies have lost interest in cricket.
This week, I learned that:
1. The Global Upswing is Strengthening. The first week of any month is dominated by business survey indicators (see this blog) and the US employment data (see this one). We now have to hand all of the global business survey indicators for December and Q4. The key point is that activity strengthened progressively through the quarter, and this time not only in the manufacturing sector. The global service sector, which was not in the vanguard of recovery in 2009, is now showing definite signs of life.
The rise in global business surveys from readings of around 53.5 in September to around 55.5 in December may not seem like much, but the direction of change is crucial, and the latest data are consistent with global GDP growth significantly above trend. Furthermore, global inventories have been falling as new orders have been rising, a combination which usually points to strong growth in coming months.
2. The US Is Doing Better, While China Raises Questions. This is not a state of affairs which is likely to last for very long, but US growth definitely seems to be strengthening, while China’s near term outlook is more concerning. This was the clear message from the latest business surveys and other recent data. The US consumer seems to have increased real spending by 4 per cent during the quarter, despite the continuing desire to pay down debt. Several readers of my earlier blogs think that the December jobs data were disappointing, but I believe that the US labour market is on the point of a more significant improvement. Meanwhile, all the components of both official and private sector PMIs for China in December suggest that growth there is now beginning to slow down, in response to a tightening in monetary conditions. No doubt the Chinese authorities hope that tightening will produce only a modest slow-down in growth, and expect that this will bring inflation under control. They may well succeed – but the Chinese economy still seems likely to slow for a while, in contrast to the US.
3. The Fed Remains Dovish. Mr Bernanke’s congressional evidence on Friday was fairly low key, but it did not indicate any urgent desire to tighten monetary policy. His admission that the economy was improving was only grudging, and once again he emphasised that inflation is below the Fed’s desired level, with the economy continuing to exhibit excessive spare capacity. Within a couple of months, the markets will begin to contemplate the possible ending of the second phase of quantitative easing (QE2) in June. My present guess is that the Fed will not extend QE beyond mid year, but nor will they raise interest rates until next year at the earliest. Yesterday, Janet Yellen, the Fed’s Vice Chairman, said that quantitative easing will reduce the unemployment rate by about 1.5 percentage points in 2012, assuming that QE2 is not actually reversed for two more years (and then only very gradually). This is probably a fairly good guide to what they currently expect to do.
4. The Eurozone Periphery Remains in Trouble. Given the upswing in the global economy, including in Germany, and the general decline in financial market risk premia, some improvement in eurozone peripheral debt spreads might have been expected. After all, GDP growth should be a key part of the solution for these economies. But market pressure is showing no sign of abating.
Debt spreads in the peripheral markets have been rising again in the past month, and markets seem particularly worried about the unsolved problems of the financial sector, especially in Ireland and Spain. George Osborne, the UK chancellor, advised the eurozone to publish more stringent stress tests on the banking sector, and then take action to solve any shortfalls in capital. This may be unwelcome advice. It may also be right.
6. Food prices will cause inflation problems, especially in emerging economies.
The Queensland floods will worsen an already serious problem. The President of the World Bank, Robert Zoellick, suggested in the FT a series of market-friendly measures to improve long term food supply. But these measures will only work over many years, if at all. The near term problem is more serious for emerging economies, where food accounts for about 30 per cent of the consumer price indices.
7. The Australians have lost all interest in sport, especially cricket. In a country of 22 million people, no-one could find an Australian willing to present the Urn (the traditional winners’ trophy) to captain Andrew Strauss after England’s victory in the Ashes series. The task was left to former England captain, Michael Vaughan. England batsman Alastair Cook hit an amazing 766 runs in the series and reached 5,000 test runs, the second youngest batsman to achieve the feat after India’s “little maestro” Sachin Tendulkar. But the quickest in terms of number of innings remains Don Bradman. It took him just 56 innings compared to 115 by Cook, and 103 by Tendulkar. The Don, the greatest talent in the history of all sport, was of course an Aussie. He didn’t much like losing either.
