Global economy looks for green shoots

ALAN WHEATLEY
Last updated 12:50 18/02/2013

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A raft of business surveys this week will be combed over for confirmation of hopes that a dire fourth quarter of 2012 marked the cyclical trough for the world economy.

An index based on questionnaires sent to euro zone procurement executives is likely to show activity is picking up, according to economists polled by Reuters.

The same goes for the closely watched monthly poll conducted by Germany's Ifo Institute and a barometer of confidence among US housebuilders.

But the green shoots of recovery still have to push through stony ground. Notably, the euro zone's advance purchasing managers' index (PMI) for February is expected to remain below the 50 mark which separates expansion from contraction.

"The big picture should be one of gradual improvement, but let's not forget that both the PMI and the euro zone's economic sentiment indicator are at levels which have historically been consistent with contraction," said Nick Kounis, an economist with ABN AMRO in Amsterdam.

Fiscal austerity, high unemployment, debt paydowns by households and weak bank lending all point to Europe's recovery being tepid in 2013.

What is more, a muddied outcome to Italy's general election on February 24-25 could revive worries about the capacity of Europe's third-largest economy to reignite growth after more than a decade of stagnation.

That in turn could disturb the calm that has settled over the euro since the European Central Bank in September removed any immediate threat to the currency's survival by promising to act as a conditional bond buyer of last resort through its Outright Monetary Transactions (OMT) programme.

Douglas Roberts, an economist with Standard Life in Edinburgh, frets that the ECB's pledge is dulling Europe's appetite for reform.

For instance, the recent failure of a big property lender in the Netherlands and troubles at Monte dei Paschi di Siena, Italy's third largest bank, were a reminder that work to strengthen the euro zone's banking sector is far from complete.

"The longer OMT seemingly does its work, it is a hindrance to progress elsewhere," Roberts said.

US FISCAL DRAG VS HOUSING RECOVERY

In the United States, one of the obstacles to rapid recovery is the prospect of a US$100 billion ($122b) reduction in across-the board government spending kicking in on March 1 unless politicians reach a last-minute agreement.

Economists at Credit Suisse estimate the cuts could reduce average annual GDP growth to 1.5 per cent from 2.0 per cent this year and to 2.3 per cent from 2.5 per cent in 2014.

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Uncertainty over tax and spending policies is an extra weight on households, already hit by an increase in payroll taxes at the start of the year that is likely to hold back spending for several months.

"You see a consumer who is a little bit nervous about whether policymakers in Washington are doing the right thing," said Jason Ware, chief analyst at Albion Financial Group in Salt Lake City.

He said a trio of reports - the National Association of Home Builders index, housing starts and existing home sales - would be important to gauge the extent to which the recovering housing sector will help to offset the drag from fiscal policy.

CENTRAL BANKS AND G20 TAKE STOCK

Minutes from the most recent meetings of central banks in the United States, Japan, Britain and Australia are likely to underscore just how weak the world economy was in late 2012.

Economists at JP Morgan estimate that global growth last quarter slowed to a rate of 1.3 per cent, less than half the trend pace and one of the worst outcomes - except for formal recessions - dating back to the 1990s.

At a meeting in Moscow on Saturday, finance ministers from the Group of 20 showed their concern over the fragile state of the world economy by deferring plans to set new debt-cutting targets.

The US Federal Reserve is buying US$85b worth of bonds a month and has said it will keep short-term interest rates extraordinarily low until unemployment falls to 6.5 per cent from 7.9 per cent now.

But some Fed policymakers in December sounded a more hawkish tone than anticipated, Ware said, adding spice to the minutes due on Wednesday of the central bank's January 29-30 meeting.

"There was a more aggressive discussion than expected about when to exit their unorthodox monetary policy if the economy gets on a more stable footing. The market's antenna went up," he said.

In Japan, by contrast, the only question is how aggressively the central bank will ease monetary policy under its new governor to try to end years of mild deflation.

Prime Minister Shinzo Abe is expected to choose his nominee for Bank of Japan governor in the next few days.

The G20 avoided singling out Japan for its bold plans to reflate the economy through monetary and fiscal policy, even though the resulting 20 percent drop in the yen since September has fed talk of a spiral of competitive currency devaluations.

Kounis with ABN AMRO said the ECB would be justified in countering sustained strength in the euro that threatened to drag inflation below its target. If verbal intervention failed, talk of a rate cut would come back onto the table.

"If the ECB has a low-inflation problem, with unemployment rising and growth weak, the very least it can do is to react to that," he said.

- Reuters

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