The global recovery has gained momentum in recent weeks, spreading across both economic sectors and geographic regions. As credit conditions continue to loosen, this broader and stronger recovery will be more resistant to unforeseen hiccups and policy withdrawal, providing encouraging evidence that the world economy will post strong growth in the first half of 2010.
These improvements are reflected in recent GDP projections. According to JP Morgan, for example, the United States is expected to expand 3.5 percent (seasonally adjusted annual rate) in the third quarter, while Japan and the Euro-area are projected to grow by 3 percent (saar). In the first half of 2010, JP Morgan predicts the United States will maintain 3.5 percent (saar) growth; Euro-area growth is expected to remain at 3 percent (saar).
Industrial Production is Gaining Momentum
The World Bank estimates that worldwide industrial production will rise by 9 percent (saar) in the third quarter as high income countries begin to contribute to global economic growth. Nevertheless, production levels still remain depressed relative to last year.
- Global industrial production bottomed in March and has since risen by 5 percent through August, according to the CPB Netherlands Bureau for Economic Policy Analysis.
- Industrial production in emerging markets has been improving since January, and is up 9.7 percent through August. This rise was led by a 13.8 percent improvement in Asia. Chinese manufacturing expanded for the sixth straight month in September. India’s industrial output rose by an annual rate of 10.4 percent in August.
- Past three months compared to previous three months, percentage change Production in advanced economies began rising in April, and since then is up 3.4 percent through August. Manufacturing in the Euro-area continued to contract, but at the slowest rate since May of 2008, as the region’s manufacturing Purchasing Manager’s Index (PMI) rose to 49.3 in September. A reading above 50 indicates expansion; one below 50 represents contraction.
- After falling by 10 percent (saar) in the second quarter, U.S. industrial production will rise by 6 percent (saar) in the third quarter, according to World Bank predictions.
- Third quarter world industrial production is still down 11.5 percent compared to the same quarter a year ago, though this represents an improvement over the 11.7 percent decline in the second quarter and 13.2 percent slide in the first.
A Firmer Outlook in the United States
Recent gains in U.S. industrial production, which primarily measures the manufacture of durable goods, combined with continued inventory decline provide encouraging evidence that consumption spending is continuing to recover in the third quarter. After peaking in the fourth quarter of 2007, durable goods consumption has fallen 12.3 percent, compared to 1.9 percent decline in total consumption over the same period.
Inventory rebuilding and fiscal stimulus will help sustain recent gains in aggregate demand.
- Production increases have come despite continued inventory cuts, suggesting that the improvements will be even stronger once retailers begin restocking. August inventories declined for the twelfth consecutive month, dipping 1.3 percent in August.
- Industrial production will also be supported by fiscal spending. The stimulus bill (PL 111-5) allocated $283 billion for discretionary spending; $244 billion of that total will be spent in the fiscal year of 2010 and beyond.
Recovery is Broadening Across Sectors and Regions
Growth in the service and housing sectors suggests that the expansion is moving beyond manufacturing.
- Service sectors in the United States and Euro-area returned to growth in September. The U.S. ISM non-manufacturing PMI rose to 50.9 in September from 48.5 in August, topping 50 for the first time in a year, as the Euro-area services PMI rose to 50.9 in September from 49.9 in August.
- The slumping U.S. housing market, until recently a major drag on growth, is continuing to improve. Sales of existing homes in the United States climbed 9.4 percent (m/m) in September. Housing starts also rose by 0.5 percent (m/m). However, building permits were down 3.0 percent (m/m), the first decline in six months.
- In the UK, home prices increased by 0.9 percent (m/m) in September following a 1.4 percent (m/m) increase in August.
Corporate earnings and personal incomes continue to climb.
- Stocks have rallied on the back of strong corporate profit reports. According to Bloomberg, nearly 80 percent of the firms in the S&P 500 exceeded profit expectations.
- Since the beginning of September, the MSCI World index is up 6.3 percent, while the MSCI Emerging Market index rose 15.3 percent.
- U.S. personal incomes from wages and salaries rose by 0.2 percent (m/m) in both July and August.
Clear signals of recovery are visible across major economies, particularly in Asia. However, preliminary GDP reports highlight that the recovery remains uneven.
- China’s growth rate quickened to an annual rate of 10.5 percent (q/q) in the third quarter; China’s target of 8 percent growth in 2009 now appears likely.
- South Korean growth accelerated to 12.1 percent (q/q) annualized in the third quarter, the fastest rate of expansion in seven years. Singapore’s GDP grew at an annual rate of 14.9 percent (q/q).
- However, the UK’s GDP unexpectedly declined by an annual rate of 1.6 percent in the third quarter, extending its recession to six quarters.
- While preliminary GDP reports for France and Germany will not be released until mid-November, Euro-area composite PMIs, which cover industry and services, are encouraging. France’s composite PMI grew from 54.8 in September to 58.4 in October, while the Euro-area’s rose from 51.1 to 53 over the same period.
Pressure to Moderate Policy
While supportive policies are still firmly in place in most regions, the recovery’s strength is increasing pressure on governments to withdraw support and on central banks to tighten monetary policy.
- Amid strong growth, Australia and Israel have already increased interest rates. China, South Korea, India, and Norway are sending signals that they will soon follow.
- Though there has been little sign of inflation in developed economies, some central bankers are taking note of rising home and equity prices. Australia cited real estate prices as justification for raising its rate. Norway, which is expected to boost its rate Wednesday, referenced the same trend.
Looking Ahead
The highlight of the week comes on Thursday, October 29, with the U.S. third quarter advance GDP estimate along with jobless claims data. The Euro-area unemployment rate, U.S. personal incomes, and Chicago PMI will be released on Friday, October 30.
This analysis was produced by the editorial staff of the International Economic Bulletin, including Shimelse Ali, Vera Eidelman, Bennett Stancil, and Uri Dadush.
