Green Shoots and False Dawns
- Markets are starting to price in a recovery
- Not all forecasters are convinced

The S&P equity index has risen by over 30% from the lows of early March, testimony to the view that the US and the global economy are at or near a cyclical turning point. This is also evident in longer term interest rate markets (US 10-year yields have risen from a cycle low of just over 2% to around 3%) and in commodity markets, which in general have also risen from the lows recorded in early 2009. The view that a recovery is at hand is not universally shared, of course, and the IMF’s recently published forecasts articulated an alternative perspective, which sees the downturn as being prolonged, followed by only a limp recovery.

Like most forecasters, the IMF has revised its economic outlook on several occasions over recent months, and now projects a 1.3% contraction in global output this year, having forecast a 0.5% rise back in January. Moreover, the Fund now expects a modest 1.9% increase in the global economy next year, against a previous expectation of a 3% recovery, with growth expected to contract again in the euro area (-0.4%), the UK (-0.4%) and Ireland, with a fall of 3% projected following a forecast 8% decline this year. These global forecasts are on the pessimistic side of the consensus, it has to be said, with that consensus in the US anticipating a return to positive growth in the third quarter of this year and growth of 1.9% in 2010 (the IMF predicts zero US growth). US consumer spending did rise in the first quarter, following two previous quarters of declines, and house sales appear to be bottoming, which also offers some support for the recovery view, as does the fact that 30-year fixed mortgage rates are at a new cycle low of 4.8%, no doubt partly due to the Fed’s actions in buying mortgagebacked debt.

The US monthly Purchasing Managers’ Indices have also picked up, albeit still signalling contraction and the weekly flow of jobless claims data may be stabilising. Employment is still falling sharply on a monthly basis, however, and although interbank rates have fallen substantially there is still evidence that the banking sector remains stressed, and not just in the US. In the UK, the picture is also mixed; retail sales rose in the first quarter (which did not prevent a 1.9% contraction in GDP), mortgage approvals have picked up and again the Purchasing Managers’ Indices are off the lows, but the labour market is deteriorating at a pronounced clip. There had been little or no positive data surprises in the euro area, in contrast, so their emergence in the past month has been a welcome development, with the PMI indices finally pointing to some stabilisation. This did not prevent the ECB cutting rates again, however, and as expected there was a further quarter point cut at the May meeting, taking the repo rate to 1%. The path from there on is likely to depend on the data, which will also help to answer the question whether we are on the cusp of a global recovery or merely witnessing a slowing in the pace of contraction.

Dr. Dan McLaughlin.