Offshore Capitalist

World Economy Continues to Defy the Pessimists

Morningstar:  The recovery phase tends to be one of the longer phases of the cycle and this time should prove no different.

Against a backdrop of continuing concerns about rising government budget deficits, tougher financial regulation and the return of protectionism, global economic activity continues to come in stronger than expected. Indicators of global activity such as the regular Purchasing Managers Indices (PMI), or the less conventional copper price are buoyant.

Emerging Economies Are Booming Again, But Europe is Lagging

Estimates for US GDP growth in the first quarter are now running at 4% (q/q annualised) following a revival in consumer spending and continued expansion in the industrial sector. Capital spending in the business sector is also growing, having picked up at the end of last year and, along with the better tone to consumption, indicates that the recovery is broadening beyond the inventory cycle.

In Japan, growth forecasts are also being revised up as business confidence rises and across Asia generally, growth is surprising on the upside as trade revives. Singapore achieved remarkable quarterly GDP growth of 32% annualised in the first quarter and China beat expectations by growing at 11.9% y/y in the first three months of 2010 with exports rising 29% y/y. Elsewhere, in the emerging markets activity in Brazil and India remains robust.

The only area not to share in the general upgrade to activity is the Eurozone where the labour market and consumer spending remain sluggish. Part of this may relate to poor weather which depressed activity at the start of the year. Fiscal tightening has also moved up the agenda as a result of the situation in Greece. Similar concerns are keeping UK forecasts on hold as investors focus on the general election. Whoever wins it is clear that the UK will be facing several years of tightening fiscal policy.

Stronger profits, the rally in financial markets, ongoing resilience in the emerging world and policy stimulus have all played a part in the recovery

We would identify four areas of support for the recovery:

1. The first would be the benefit of the strong recovery in corporate profits. The macro numbers have improved as US firms have started to deploy their cash flow by raising capex and beginning to recruit again. Although this has been accompanied by a rise in unemployment as firms cut costs, the fact that it was delivering strong productivity and profits gains indicated that the pace of cost cutting would moderate and eventually cease. Importantly, unemployment is a lagging indicator whilst profits lead economic activity.

2. Second, is the stabilisation and recovery in financial markets. Although some see this as misplaced (a “distrusted rally”), the revival has increased household wealth and allowed companies access to capital. From a macro perspective, this helps both consumer and corporate spending.

3. The ongoing strength of the emerging world has also played a part with the Asian and LatAm economies rapidly regaining the output lost in the downturn and proving able to withstand the drop in global trade.

4. Fourth, underlying all these factors has been the continued level of policy stimulus, with both fiscal and monetary policy providing significant support.

via World Economy Continues to Defy the Pessimists: PERSPECTIVES: The recovery phase tends to be one of the longer phases of the cycle and this time should prove no different.

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