Global Economic Update: Improving Sentiment

Global Economic UpdateAs we enter the home stretch for 2013, indicators of business and consumer sentiment reflect growing optimism that 2014 will be a better year than 2013 in every region. In Europe, the transition from recession to recovery continues with mixed results depending on the country.

In the Asia/Pacific region both Japan and China continue to show improvement with signs of stronger manufacturing and, in Japan, healthy growth in consumer spending. The U.S. saw consumer confidence drop amidst other signs of continuing slow growth, however, this reflects the impact of the Government shutdown and should be reversed in the current month.

OPTIMISM IS RISING

Consumer Confidence IndexIn 2011 the global economy was poised to take off. After the recession and a year of modest growth most of the developed and emerging world was poised to enter a period of healthy growth. Businesses which had been cutting expenses to improve profitability had slowed the pace of layoffs and it appeared they were ready to take risks and hire again in anticipation of future profits. Then the combination of sovereign debt crises in the U.S. and the Euro Zone put that optimism and risk acceptance on hold. Risk aversion became the attitude of most businesses, with the notable exception of those in the energy and creative/technology sectors. The result was recession in Europe and weak growth in the U.S. This led to a slowdown in Asia as the demand from the West slowed just as the stimulus programs put in place to weather the recession were winding down.

It has taken two years, several elections and political confrontations to finally get to the point where the global economy is once again poised to enter a period of healthy growth. The good news is the private sector is in much better shape today than it has been in a very long time. Debt is low, interest rates remain at historic lows and households and businesses have the capacity to spend. All they are looking for is a little confidence that the environment in the future will be better than what we have experienced over the past two years. That confidence now appears to be emerging. It’s still fragile, but it is there and it points to a better global economic environment in 2014.

EUROPE

  • In Europe, even though not all indicators have turned positive, there is growing optimism, particularly in the eurozone nations suggesting that 2014 will be the first year of GDP growth since 2011. Signs of improving confidence were evident in the eurozone’s Business and Consumer Sentiment Survey for October which increased to the highest level since August 2011, when the sovereign debt crisis was intensifying. Manufacturers and consumers accounted for the bulk of the improved sentiment in October. In the United Kingdom consumer confidence declined slightly in October, but this comes after a string of healthy increases dating back to April. Indications of improving labor markets appear to be boosting consumers’ attitudes.

AMERICAS

  • In the Americas the impact of the partial government shutdown was evident in the consumer and business confidence data released over the past two weeks. The Conference Board’s consumer confidence index dropped to its lowest level in six months reflecting the disillusion with Congress’ inability to agree to a budget during the first two weeks of the month. Nevertheless, the decline still puts the index higher than it has been for most of the past two years. Meanwhile September manufacturing production and retail sales report both disappointed pointing to continuing modest growth.
  • One positive note was the release of the Purchasing Mangers’ Index for October which rose to its highest level since early 2011. This indicator of manufacturing activity might be pointing to a stronger start to the fourth quarter, but we will need more evidence, especially as we gauge the impact of the government shutdown.

ASIA PACIFIC

  • In the Asia Pacific region Japan reported a number of positive statistics for September including a decline in the unemployment rate accompanies by a sharp increase in total employment, led by a surge in payrolls in the manufacturing sector. In addition, consumer spending in Japan grew strongly in September with retail sales jumping 3.1%. It appears that the optimism about Japan’s economy growing more strongly is justified. Elsewhere in Asia, the purchasing Managers Index for China increased to a six month high indicating that the manufacturing sector in that country continues to rebound from the 2013 slowdown.

CONCLUSION

The global economy continues to transition toward stronger growth in 2014. In some cases the improvement in sentiment appears to be outpacing the reality on the ground, but throughout the world as more economic data comes in it becomes increasingly clear that the outlook is much better for just about every region of the world than it has been since 2011.

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