Growing Pains

30/05/2014 at 4:07 pm

Towards the end of last year this blog noted that growth would be a key theme for 2014: “A gathering of momentum … should see gloom continue to recede from markets which have had to trudge through a bruising and tedious few years.”

And then we had news out yesterday that the US economy shrank a little in Q1, contrary to the advance estimate that it was ever so slightly up. Two weeks previously, the eurozone economy was reported to have grown by 0.2% in the same period – half the forecast rate.

So is growth falling away again? And if so, will we see gloom return?

The answer to the second question, so far, is a clear “no”. The last time we had a negative quarter for US GDP was Q1 2011. When reported in the summer of that year it triggered an almighty panic; this week’s news hardly caused a ripple. Of course the market backdrop is different now, with the sovereign debt crisis not as raw and the credit crunch more distant a memory. But the evidence on the first question suggests that markets are behaving rationally rather than over-exuberantly in taking Q1 data in their stride.

Weakness in the US was widely expected in the first quarter. We know that the very harsh winter had a role to play and there seems to have been some contraction due to inventory building in 2013. Both these may fall away – and other data strongly suggests that they will do so, with durable goods orders, retail sales, manufacturing output and consumer confidence all rebounding from winter lows, real estate activity stabilising with mortgage rates and unemployment measures declining convincingly.

The European picture is a little more equivocal, with much of the shock being due to unexpected stagnation in France (a risk I highlighted back in January). And we wait to see just how negative the effect of last month’s sales tax hike will have been in Japan. At the same time, however, GDP growth here in the UK has held its ground admirably, activity indicators suggest it will continue to do so and only this morning, the consumer confidence index from GfK reached its highest level for over nine years. In Europe too, the broad economic sentiment indicator for the eurozone as a whole has kept on climbing even as French business sentiment has weakened a little.

It is always disappointing to see economies shrink of course, and a blemish on recent quarters for the developed world. Up until the US data revision this week the American, eurozone, Japanese and UK economies had all been growing for four consecutive quarters, the longest unbroken stretch since the early days of recovery from the Great Recession in mid-2009 to 2010. But looking at the bigger picture it seems very unlikely that we are about to experience another round of sclerosis a la 2012.

Altogether, then, the growth picture is consistent with the conclusion drawn last week regarding corporate activity: that we are witnessing an unwelcome hiatus rather than a more serious trend reversal. Again, this is not an especially exciting position for the world to be in; but given the form which excitement has tended to take in recent years, we should not perhaps feel overly glum about this.


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