US economy maintains growth while eurozone economy stabilises

Last week's economic data should further ease concerns of a global economic recession.

The United States economy showed good growth at the end of last year. The Commerce Department reported last week that real gross domestic product increased at an annual rate of 2.8 percent in the fourth quarter, faster than the 1.8 percent rate in the prior quarter.

The acceleration in growth, however, was exaggerated by an increase in inventories. The GDP report showed that private inventories added 1.94 percentage points to the fourth-quarter growth rate after having subtracted 1.35 percentage points from the third-quarter growth rate.

The underlying momentum in the economy is probably better reflected by personal consumption expenditures, which increased 2.0 percent in the fourth quarter compared with an increase of 1.7 percent in the third.

Perhaps more encouraging was the solid 10.9 percent growth in residential investment. Growth in residential investment usually leads growth in the economy as a whole.

Another indicator that pointed to a positive outlook for the US economy was the Conference Board's leading economic index. This index increased 0.4 percent in December to 94.3 after having increased 0.2 percent in November and 0.6 percent in October.

The eurozone economy has not fared as well as the US, being widely expected to have contracted in the fourth quarter. However, economic data on the euro area last week showed that things may have improved since then.

The flash reading of a composite output index for the euro area compiled by Markit Economics rose to 50.4 in January from 48.3 in December. It was the third consecutive increase in the index and the first time the index has been in positive territory in five months.

Among the sector indices, the services PMI rose to 50.5 in January from 48.8 in December while the manufacturing PMI rose to 48.7 from 46.9.

In his comments on the data, Markit's chief economist Chris Williamson said that the eurozone economy appears to have stabilised in January and that “a slide back into recession may be avoided”.

Also pointing to a better start to the year was the Ifo index of German business confidence, which rose to 108.3 in January, a five-month high, from 107.3 in December.

US economy accelerates, Fitch downgrades five European countries

The Commerce Department reported on Friday that the US economy grew at a 2.8 percent annual rate in the fourth quarter, accelerating from the 1.8 percent rate in the prior quarter. Growth was boosted by a large increase in inventories.

An improvement in consumer sentiment in January provides hope that the economic momentum can be maintained in the current quarter. The final reading of the Thomson Reuters/University of Michigan's consumer sentiment index rose to 75.0, the highest since February 2011, from 69.9 the month before.

Earlier on Friday, there was also positive news from Japan, where retail sales rose 2.5 percent in December from a year earlier.

Another report from Japan on Friday showed that consumer prices excluding fresh food fell 0.1 percent in December from a year earlier.

Meanwhile, Europe got hit by another wave of credit rating downgrades on Friday. Fitch Ratings cut the credit ratings of Italy, Spain, Belgium, Slovenia and Cyprus.

However, investors have become less pessimistic about Europe's debt problem. Italy successfully sold 11 billion euros of Treasury bills on Friday after having sold 5 billion euros of inflation-linked and zero-coupon bonds the previous day.

But Europe's problems are far from over. Even as talks on Greece's bailout and debt restructuring remain on-going, analysts are now seeing an increasing probability that Portugal will also need another bailout.

US economic data on Thursday mostly positive

Thursday's economic data indicated that the US economy maintained growth at the end of 2012 and is likely to continue to do so in early 2012.

The Chicago Fed National Activity Index rose to 0.17 in December from minus 0.46 in November. The three-month moving average rose to minus 0.08, the highest value since March 2011, from minus 0.19.

Economic growth is likely to be sustained in early 2012. The Conference Board's Leading Economic Index increased 0.4 percent in December following a 0.2 percent increase in November.

Boosting the outlook for the economy was a 3.0 percent increase in durable goods orders in December. An 18.9 percent jump in orders for civilian aircraft drove the increase but even excluding transportation equipment, orders were up 2.1 percent. Orders for nondefense capital equipment goods excluding aircraft rose 2.9 percent.

Not all the US data on Thursday were positive though.

New home sales fell 2.2 percent in December. That left new home sales for the whole of 2012 at a record-low level of 302,000.

New claims for unemployment benefits rose 21,000 to 377,000 in the week ended 21 January. However, the four-week average fell 2,500 to 377,500.

Fed to keep monetary policy accommodative

The Federal Reserve looks set to keep monetary policy highly accommodative for a few more years. Bloomberg reports on the outcome of the Fed's monetary policy meeting on Wednesday:

Chairman Ben S. Bernanke said the Federal Reserve is considering additional asset purchases to boost growth after extending its pledge to keep interest rates low through at least late 2014.

Policy makers are “prepared to provide further monetary accommodation if employment is not making sufficient progress towards our assessment of its maximum level, or if inflation shows signs of moving further below its mandate-consistent rate,” Bernanke said at a news conference today after a Federal Open Market Committee meeting in Washington. Bond buying is “an option that’s certainly on the table.”

The extension of the duration of low rates comes as the Fed lowered its forecast for growth this year to 2.2 percent to 2.7 percent from 2.5 percent to 2.9 percent in November. The projection for next year's growth has been lowered to 2.8 percent to 3.2 percent from 3.0 percent to 3.5 percent.

The Fed also revealed on Wednesday that it has set a 2 percent target for inflation.

While recent economic data have mostly indicated that the US economy continues to grow, Wednesday did bring a negative report in the form of a 3.5 percent decline in pending home sales in December, which nevertheless left it near a 19-month high.

Meanwhile, the data from Europe has gotten better in recent days. Wednesday continued that trend with a report that the Ifo index of German business confidence rose to 108.3 in January, a five-month high, from 107.3 in December.

Somewhat less positive was the news on Wednesday that the UK economy shrank by 0.2 percent in the fourth quarter. Further declines in the UK economy looks likely to be limited though after the Confederation of British Industry reported that its total order book balance rose to -16 in January from -23 in December.

IMF cuts global growth forecast, euro area moves back into expansion but Japan shrinks

The IMF has cut its global growth forecast for this year to 3.3 percent from a September forecast of 4 percent. Olivier Blanchard, the IMF’s chief economist, told a news conference on Tuesday that the “epicenter of the danger is Europe but the rest of the world is increasingly affected”.

Ironically, this comes on the day when the eurozone economy is looking better. While eurozone industrial orders fell 1.3 percent in November, Markit's flash eurozone composite PMI jumped to 50.4 in January from 48.3 in December, with the manufacturing PMI rising to 48.7 in January from 46.9 in December and the services PMI rising to 50.5 from 48.8.

There was also positive news from the US on Tuesday, where the Richmond Fed's manufacturing index rose to 12 in January from 3 in December.

The news from Japan, though, has been negative.

While many fear that Europe's debt crisis may make it the next Japan, it may well be Japan that becomes the next Europe. The government said on Tuesday that it will miss its deficit reduction target. The ratio of its primary budget deficit to gross domestic product will be halved one year later than planned after it pushed back the timing of a sales tax increase. And by fiscal year 2020/21, the primary deficit is projected to be 3.0 percent of GDP, well short of its target to return to a primary budget surplus.

Japan's debt problem is being exacerbated by slow economic growth. On Tuesday, the Bank of Japan reported lowered growth estimates for the economy as it left its key interest rate unchanged at between zero and 0.1 percent. It now sees the economy shrinking 0.4 percent in fiscal year 2011, down from its previous projection of 0.3 percent growth. The BoJ also said it expected growth of 2.0 percent in fiscal year 2012, down from its previous forecast of 2.2 percent growth.

It does not help that Japan's trade surplus has vanished. A report on Wednesday showed that exports fell 8.0 percent in December from a year earlier, resulting in an annual trade deficit of 2.49 trillion yen, the first annual deficit in 31 years.

Mixed data from euro area, economy remains in dangerous state

There was mixed news from Europe on Monday.

The initial estimate of the consumer confidence index in the euro area rose to minus 20.6 in January from minus 21.3 in December.

However, an indicator of French business confidence fell to 91 in January from 94 in December.

Meanwhile, the talks on Greek debt restructuring have not produced a resolution, with eurozone finance ministers rejecting the latest offer from private bondholders on Monday.

However, Simon Johnson thinks that Italy remains the biggest problem and, in a paper with Peter Boone, says that “we expect several more sovereign defaults and multiple further crises to plague Europe in the next several years” and that Europe's economy remains “in a dangerous state”.