The last fortnight has seen more evidence that the world economy is stabilising after the growth scare at the start of the year. Most prominently the US economy expanded by 3.2 per cent on an annualised basis in the first quarter, almost twice as strong as the markets expected just a few weeks ago. US jobs growth has also surpassed expectations, with the latest reading reinforcing thoughts of a ‘Goldilocks economy’ which is not too strong and not too soft.
While the drop in the unemployment rate to a 49-year low of 3.6 per cent was one of the main headlines from the April employment report, it was actually one of the weaker aspects of it. This is because it was caused by a massive 490,000 fall in the labour force in April, more than outweighing the 103,000 decline in the household measure of employment.
Nonetheless the other components of the report were more encouraging. With a 263,000 gain in non-farm payrolls after 16,000 in upward revisions, the second quarter has begun very firmly keeping the six-month trend above 200,000, and with gains for both the goods and services sectors.
The workweek and hours-worked data slipped back, however, while wages were unchanged from March at 3.2 per cent year-on-year after 3.4 per cent in February. This echoed some of the strengths and weaknesses of the GDP report, where overall output rose strongly and to some extent was caused by transitory factors such as rising inventories, yet with inflationary pressures still largely absent in a 1.6 per cent underlying price deflator.
However, it is not only the US that is producing better than expected data suddenly. The eurozone also surprised positively with a 0.4 per cent Q1 GDP growth rate, up from 0.3 per cent in the previous quarter. This benefited from an unexpected quarter-on-quarter acceleration in Spanish GDP growth of 0.7 per cent and steady 0.3 per cent growth in France, with Italy also pulling out of recession. The full breakdown is likely to show a pick-up in inventories, as in the US, and as such the figures are likely to overstate the true health of the eurozone economy.
Likewise in the UK, monthly GDP was better than expected at 0.3 per cent in the three months to February, and looks on course to deliver a growth rate of close to 0.5 per cent quarter-on-quarter for the first quarter when it is released later in the week. While an inventory build-up will again be the most likely explanation for the strength, and thus may not be wholly relied upon as a predictor of future growth, the improving data in both Europe and the US should at least go some way to disavowing the markets of the likelihood of an imminent recession.
Beyond the quarterly GDP reports, stabilisation is also beginning to be seen in some of the monthly purchasing manager’s (PMI) data, but here the evidence is not as clear. Markets took heart from the Chinese growth rate of 6.4 per cent a month ago, and this was quickly followed by improvements in Chinese PMI readings above 50 suggesting that stimulus measures are starting to work. However, those bounces in activity have to some extent petered out showing that sustaining these recoveries is going to be a lot harder.
US Institute of Supply Management data and PMI readings have also shown more volatility of late as they have in eurozone and the UK. This more mixed monthly data is also apparent in the GCC, where recovering headline PMI data has also been observed in the UAE and in Saudi Arabia while beneath the surface the components of the surveys reveal challenging labour markets and difficult pricing conditions.
Thus while the recoveries in headline GDP might appear heartening, hinting at a world economy that is starting to stabilise, there still appears to be a lot more work to do to make them sustainable. Not only do the rebounds in growth appear to be driven in part by transitory factors, the conditions beneath the headlines are a lot more complex than might appear at first sight. Last week the Fed said that it does not see a strong case to move interest rates in either direction, which is not only appropriate for the US economy but probably for the rest of the world.
Tim Fox is chief economist & head of research at Emirates NBD
