After months of hand-wringing about the durability of the current rapid world economic expansion, fears of a sudden, sharp slowdown later this year have eased.
Leading indicators of activity around the globe are pointing to renewed vigor as mid-year approaches, with many economists surprised by the momentum built up during the year-long recovery from the United States to Asia and now even in lagging Europe.
Even as oil prices hover about $40 per barrel and official US interest rate rises loom, bellwethers of industrial activity, trade and demand are pushing higher again.
Since mid May, metals prices, world equities and a slew of company surveys have all bounced sharply or shown new strength.
“Thoughts of a sudden stalling of the world economy this year have now passed,” said Klaus Baader, economist at Lehman Brothers. “The momentum and the resilience in activity we are seeing right into the middle of the year is impressive.”
The betting is still on a cooling of the supercharged world economy next year from 2004 growth rates in excess of 4.5%. Tighter US monetary and fiscal policies and China’s restrictions on borrowing and investment should see to that. However, It looks increasingly like a gentler slowdown than many investors were fretting about only a couple of months ago.
Significant tailwinds emerging
Corporate capital expenditure is rising - most notably in Japan - and new hiring in the United States, Britain and Japan is now robust. And the job market improvement is offsetting concern about the impact on households of higher interest rates.
What is more, some of the more extreme bottlenecks in non-oil commodity markets and shipping seen early this year have now eased and financial markets have already gone some way to discounting expected rises in official interest rates.
Oil prices at current levels will inevitably be a drag. But even assuming these prices are sustained, economists reckon this will take less than half a point off world growth next year.
Gulf security concerns remain a wild card for oil, but high energy costs are also largely a result of robust world demand and companies so far seen to have been able to absorb the hit.
Market pricing shifts
At the end of the first quarter, many investors scurried for cover on concern that China’s plans to slow its booming economy and US interest rate rises might trigger a so-called hard landing the second half of 2004.
A picture of resilience in underlying activity has seen a turnaround in sentiment in the past two weeks, however.
Instead of a steep slowdown, China’s headline growth rate is likely to have accelerated in the second quarter to 11.4% year-on-year from a 9.9% annual rate in Q/1.
While this will have been distorted higher due to comparisons with the SARS-depressed period last year, adjustments for SARS still point to second quarter growth rates about 9.5%.
Surveys of the world’s biggest manufacturing firms, meantime, continue to report accelerating activity last month in the United States, the euro zone, Japan and Britain.
A global manufacturing index, compiled by research firm NTC for JPMorgan and gleaned from NTC polls of some 7,000 companies around the world, showed on Tuesday its index of factory activity rising to 57.7 last month from 57.3 in April.
In Europe, similar surveys of the dominant service sector also showed an acceleration in May and even the relatively depressed labor market there showed signs of improvement.
But even before these sentiment surveys were released, a series of financial and commodity market indicators - viewed by many analysts as the most timely indicators of economic trends - had already been rebounding since mid-May.
From a low for the year on May 17, the MSCI World Free index of world stocks has rallied 5.4% - even though it remains about four percent below February peaks. Broad equity indices often act well as a harbinger of aggregate economic activity by discounting future company earnings. The picture is more marked i