Thursday, 16 June 2005

Global economy shows strength despite low inflation

Inflation may be cooling around the world, but don't write off the global economic expansion yet.

The US Labor Department reported yesterday that the US consumer price index fell 0.1 percent in May after rising 0.5 percent in April. While the fall was mainly due to a decline in energy prices, which fell 2.0 percent, the core index -- excluding food and energy -- rose only 0.1 percent in May.

At the same time yesterday, the US Commerce Department reported that US business inventories grew 0.3 percent in April while sales rose 1.2 percent.

Also yesterday, the Federal Reserve reported that industrial production rose 0.4 percent last month after a 0.3 percent drop in April, powered by a 0.6-percent rise in manufacturing. And in its Beige Book report, the Federal Reserve reported that the overall economy continued to expand with only moderate price pressures.

Further evidence that there is still life left in manufacturing comes from the Empire State Manufacturing Survey by the Federal Reserve Bank of New York, whose general business conditions index, which had slipped to a two-year low of -11.1 in May, rebounded to 11.7 in June.

The economic expansion may be further underpinned by continued strength in the housing market. The National Association of Home Builders/ Wells Fargo Housing Market Index (HMI) released yesterday rose one point to 71 in June, its highest level since December 2004.

Certainly, there were no signs of a slowdown in the other engine of global economic growth, China. According to the National Bureau of Statistics yesterday, China's industrial output rose 16.6 percent in May from a year earlier. And the previous day, the bureau had reported that China's retail sales rose 12.8 percent in May from a year earlier.

But don't count too much on other economies making substantial contributions. The Conference Board reported yesterday that the leading index for the UK decreased 0.4 percent in April. However, it did add that the "leading index is still on a rising trend despite small declines in the last two recent months".

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