Monday, 8 March 2010

Global economic recovery continues in early 2010

The global economy is likely to continue growing in early 2010, although the United States economy is still losing jobs and the economic recovery is looking fragile in the euro area.

On Friday, the Organisation for Economic Co-operation and Development released its composite leading indicators for January 2010. According to the OECD report, the indicators "continue to signal an improvement in economic activity for the G7 countries although only marginally more so than in the assessment for December". The CLI for the OECD area increased by 0.8 point in January.

Also released on Friday was the employment report for the US. This showed that nonfarm payrolls declined by 36,000 in February while the unemployment rate was unchanged at 9.7 percent. Considering the bad weather during the survey period, this could be considered a decent report.

Employment could start expanding again in coming months with continued economic recovery.

The latest data from the Commerce Department show that the US economy grew at an annualised rate of 5.9 percent in the fourth quarter of 2009 and the Institute for Supply Management's reports indicate that the economy continued to expand in early 2010. The ISM's manufacturing PMI fell to 56.5 in February from 58.4 in January while its non-manufacturing index rose to 53.0 from 50.5. With both indices above 50 in the past two months, economic activity in the US likely expanded at the beginning of this year.

A recovery in consumer spending has helped keep the overall economic recovery going. Consumer spending rose again in January by 0.5 percent and it has now essentially recovered from the recession. After adjusting for inflation, consumer spending in January was only 0.3 percent lower than at its peak in November 2007.

Still, the prolonged period of high unemployment may be taking its toll on consumer confidence. The previous week, reports showed that the Reuters/University of Michigan index of consumer sentiment for February dropped to 73.6 from 74.4 in January while the Conference Board’s consumer confidence index plunged to 46.0 in February from 56.5 in January.

The economic recovery in the euro area may be more fragile.

Real gross domestic product in the euro area was just 0.1 percent higher in the fourth quarter than in the previous quarter and recent data show that it is not getting any better in early 2010. The European Commission's economic sentiment indicator for the euro area fell to 95.9 in February from 96.0 in January while Markit's composite PMI, based on a survey of euro-area purchasing managers in manufacturing and service industries, was at 53.7 in February, unchanged from the previous month.

Official projections also acknowledge the fragility of the economic expansion in the euro area. The European Commission's latest forecast for eurozone growth in 2010 is 0.7 percent while the European Central Bank is forecasting growth of between 0.4 percent and 1.2 percent.

Japan's economic recovery is also widely considered to be fragile. Still, the economy managed to grow by 1.1 percent in the fourth quarter according to a preliminary government estimate, its third consecutive quarter of expansion.

And the expansion has continued at the beginning of 2010. A preliminary estimate of industrial production in January showed a 2.5 percent increase, the 11th consecutive month of increase and the biggest monthly rise since May last year.

However, growth in the Japanese economy remains highly dependent on exports. Today, the government reported that Japanese exports rose 40.6 percent in January from a year earlier and 8.8 percent from December.

A sustained recovery in the Japanese economy will probably require a sustained recovery in the rest of the global economy.

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