Euro Zone : Slight Improvement of the Outlook

The outlook for the euro zone economy is improving a little taking into account the recent evolution of the Conference Board (CB) leading economic index. That index was up in November (0.6 percent) and December (0.8 percent), after having almost stagnated in September (-0.2 percent) and October (0.2 percent) according to data published January 27. From June to December, the index showed an increase of 3.0 percent, compared to 3.2 percent in the six preceding months. Then, the pronostic is one of a stable pace of growth or moderate growth in the coming months.

Moreover, the European Commission released January 27 the most recent results for its Economic Sentiment Index, one of the components of the CB leading economic index for the euro zone. The ESI is stable in January when compared to December, but in the last months it remained neatly above the average long term trend, notably because the confidence in the industrial sector continued to improve. Consumer confidence has lately followed the average long term trend.

In the January 25 update of its World Economic Outlook, the IMF forecasts a GDP growth of 1.5 percent in the euro area in 2011, with 2.2 percent in Germany, 1.6 percent in France, 1.0 percent in Italy and 0.6 percent in Spain.

Inflation in the euro zone and the financing of the huge public debt in many countries are still major concerns, and they tend to push interest rates upward at a time where other economic fundamentals would not justify such a trend.
 

World Economic Outlook : Update

The world economic recovery, that began  at mid-year in 2009, will continue in 2011 and 2012 according to the International Monetary Fund. That organism published today its most recent estimates of the evolution of the world economy. World GDP growth forecasts for 2011 were revised slightly upward compared to last October (4.4 percent instead of 4.2 percent), notably because the US economy is expected to grow by 3.0 percent instead of 2.3 percent since the adoption of monetary and fiscal expansionist measures at the end of 2010.

Without surprise, the outlook is brighter for emerging economies than for advanced ones. In many emerging countries, there are even signs of overheating, as we can see with the evolution of consumer prices, while in advanced ones difficulties in financing the public debt, especially in Europe, hang on the growth outlook.

Technical point : The 4.4 percent world GDP growth for 2011 is based on the purchasing power parity method which results in more weight for the emerging economies. When using market exchange rates, the forecast for world growth is down to 3.5 percent.

Details at : http://www.imf.org/external/index.htm

United States : acceleration of the pace of economic expansion

The recent evolution of the Conference Board leading economic index supports the forecasts of an economic growth acceleration in the United States in 2011. The CB index, published January 20, increased by 1.0 % in December compared to November, and 3.3 % from June to December compared to 2.4%  the six preceding months. My comment of January 18 examines the growth outlook in 2011 in the United States. Add to that the January 19 forecast from the Bank of Canada of a US GDP growth of 3.3 % this year.

Details at : http://www.conference-board.org/data/bcicountry.cfm?cid=1

Canada : stable pace of growth

The canadian economy should continue to grow at a stable and moderate pace in the coming months, based on the recent evolution of Statistics Canada leading economic index. In December, that index increased by 0.5 % for a third month in a row according to data published January 20.

This pronostic of moderate growth in the economic activity is also retained by the Bank of Canada in its quarterly report on monetary policy published January 19. The Bank forecasts a canadian GDP growth of 2.4 % in 2011. This should not be sufficient to improve significantly the labor market prospects.

United Kingdom : prospects of moderate growth

Leading indicator indices on the evolution of the United Kingdom economy suggest a moderate pace of economic growth in the coming months. The Conference Board index, published yesterday, did not move in November, but, from May to November, it increased by 2.4 %, compared to 3.1 % the six preceding months. The OECD equivalent index points towards a stable pace of economic expansion, just over the long term historical trend.

After an important decrease in economic activity in 2009, the UK economy had a moderate growth in 2010, estimated at close to 2.0 %. Prices are actually going up more rapidly than the target established by the Bank of England, which could bring the Bank to increase its base interest rate sooner than what the economic fundamentals would prescribe. Important restrictions to governmental spending will start next April. The combined effect of eventual interest rates increase and of a slower growth of governmental spending could affect downward the economic outlook. For the moment, expected GDP growth  in the UK, in 2011, go from 1.2 % to 2.5 %, the average being 1.9 %, according to The Economist poll of forecasters (January 8 edition).

United States : economic growth forecasts for 2011

Economic growth forecasts for the american economy in 2011 have been revised upwards during the last few weeks. Fears of an important slowdown, even for some the second phase of a double dip recession, had brought down growth forecasts from last summer to mid-fall. In October and early November, GDP growth estimates for the US economy were only at 2.3 % according to the IMF World Economic Outlook, the average forecast from The Economist poll of forecasters and the Bank of Canada.

A monetary policy even more expansionist (QE2), announced by the Federal Reserve last November, and fiscal measures, also expansionist, adopted by the US Congress last December, brought the economists to recalculate their GDP growth forecasts for 2011. The Economist poll of forecasters average estimate is now at 3.0 %, the same as the average forecast from more than 100 economists that participated, in early December, to a Chicago Fed economic outlook symposium. The Conference Board, which a few weeks ago, forecasted an economic growth of only 1.7 %, made known, on January 11, its revision to 2.5 % GDP growth.

Germany, the fourth in the world for the importance of its economy, is an other country where the economic outlook has been significantly revised  up for 2011. The average GDP growth forecast went progressively from 1.6 % last August to 2.4 % earlier this month (ref. : The Economist, Jan. 8 edition).
   

China : accelaration of the expansion bringing a change in the monetary policy

Leading economic indices from the Conference Board (CB) and the OECD point towards an acceleration of the pace of growth in China in the coming months. From May to November, the CB index, released January 13, increased by 4.7 % compared to 3.3 % in the six preceding months. The OECD index is on a growth path from September to November, after having let believe previously to a downturn.

Taking into account the important raise in consumer prices in China and a better outlook for the world economy, the People's Bank of China changed the orientation of its monetary policy last autumn : it went from "moderately loose" to "prudent". So interest rates increased twice by a quarter of a point on October 19 and December 25. The central bank raised also many times the bank reserves in a way to slow down the supply of credit, the most recent increase happening yesterday, January 14. Will it be sufficient? Many analysts think that interest rates could go up at least twice again by the end of this year. 

Japan leading economic indicators, a special case

Diverging signals come from leading indicator indexes related to short term economic prospects for Japan's economy. The Conference Board index, published January 11, points towards a sharp slowdown of the pace of growth. It decreased in November (-0.6 %) compared to October, and from May to November (-4.1 %) compared to the six preceding months. Four of the seven components of the index went down in November.

The equivalent index from the japanese government, published on January 11 and revised on January 20, increased significantly, going from 97.7 in October to 100.6 in November, after a few months of decline. Almost all the components of the index went up in November. But a one month increase, even if important, is not sufficient to make or change a pronostic.

The OECD composite leading index for Japan, released on January 10, points towards an acceleration of the economic expansion since the last few months.

Japan seems to be the only country where leading indices by different organizations offer such different outlooks. Differences in GDP growth forecasts are also significant. For 2011, forecasts go from 0.1 % to 2.0 % growth, according to The Economist  (January 8 edition) poll of forecasters.
 

Quebec : the outlook is improving

A moderate optimism about the Quebec economy can take place based on the recent evolution of Desjardins leading indicator index. That index increased significantly in October (0.7 %) and in November (0,6 %), according to data published today, after having stagnated from May to September. Moreover, since the adoption, last December, by the US Congress, of expansionist fiscal measures, growth estimates for the US economy were revised upward for 2011, a signal that the prospects are looking better for Quebec exports. Commodity and industrial good prices have increased in the recent months, which also helps to improve the outlook, especially for the regions where the economic activity is based on those products. Even the price of lumber has been up lately. 

Details at : http://www.desjardins.com/en/a_propos/etudes_economiques/conjoncture_quebec/indice_precurseur/               

OECD leading indicators : new encouraging signals for the world economy

The world economic outlook is improving significantly these days. The OECD published this morning its monthly indices of leading indicators for 35 countries, and we can conclude from them that the pace of economic expansion in the world will accelerate in the coming months. Encouraging signs of accelerating economic expansion are coming from the United States, China, Japan and France, respectively ranking first, second, third and fifth in the world for the importance of their economy.

Few countries have an outlook inferior to their historical trend; Brazil is in that group for a fifth month in a row, Greece and New Zealand, by few, are the others. The outlook is improving for Ireland where, for a sixth consecutive month, the leading indicator index points to economic growth superior to the historical trend. In Spain and Portugal, other countries of the euro area where there are difficulties to finance the public debt, there will be a downturn, but the outlook for the coming months is slightly above the historical trend.

Details at : http://www.oecd.org/department/0,3355,en_2649_34349_1_1_1_1_1,00.html