The recovery has left behind the period of setbacks of the first six months

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July 9th, 2014

Global growth gains momentum for the second half of the year. The US, Japan and China have managed to withstand their obstacles quite well, these being of a different nature in each case. The situation also looks encouraging for the emerging economies albeit with some notable exceptions. The prospect of normalisation for US monetary policy is the biggest challenge for global expansion to consolidate.


The first quarter's contraction in GDP was extensive but has not altered the underlying trend of recovery. GDP fell by 2.9% annualised quarter-on-quarter in 2014 Q1 and not by the 1.0% initially calculated, and by 1.5% in year-on-year terms. The base effect of this first quarter, strongly influenced by the bad weather and other temporary factors, has led us to revise downwards our forecast for 2014 as a whole from 2.6% to 2.2%, in line with the revisions carried out by the Fed and IMF. However, the latest indicators point to the recovery continuing and the outlook is one of robust growth for the remainder of 2014 and for 2015 (the year in which we predict growth of 3.1%).

In addition to the adverse weather, this setback can also be explained by the delay in the implementation of  Obamacare. This factor, affecting private expenditure on healthcare, accounts for two thirds of GDP's downward revision. Due to deferments until April of the implementation of the Affordable Care Act (the law that makes it mandatory to have medical insurance but has lowered the cost for people on low incomes), consumers postponed their doctor visits waiting for this health coverage to come into force and thereby save on their bills. After such temporary effects, we expect  private consumption to pick up steam in line with the improved expectations, as shown by the rise in the Conference Board Consumer Confidence index which, in June, reached 85.2 points, its highest level since the Great Recession.  May's increase in retail sales, up by 0.3% month-on-month (after being revised upwards in April) and the qualitative indicators contained in the Fed's Beige Book also point towards slightly more solid consumption in Q2 and the following quarters.

The outlook for investment is steadily improving. The ISM index for business sentiment and activity rose again in May, both for manufacturing and services, and the activity index produced by Markit suggests this improvement will continue in June with levels corresponding to growth in GDP of close to 4% annualised quarter-on-quarter. Since the end of the Great Recession, investment has seemed reluctant to confirm these positive expectations with a recovery that is lagging behind the rest of the economy. But a series of favourable factors (see the Focus «A return to investment in the US: better late than never» in this issue) should help investment to finally take off in the second half of 2014.

Housing has recovered from its slump and is back on the road to growth, albeit at an understandably more moderate rate than in 2012 and 2013 when it was starting from very low levels. Real estate sales picked up in May and new houses started in the same month reached 66% of their 1995-2000 level; i.e. before the bubble (in November 2009 this bottomed out at a meagre 35%). The Case-Shiller index for house prices, which covers 20 metropolitan areas, also confirms the good tone being shown by the real estate market with an increase in April that was modest but continuing the upward trend. The index has recovered by 25.2% since May 2009 (in absolute terms close to half what was lost in the Great Recession).

The CPI continues to moderate but not to such a great extent. Prices are not showing any worrying inflationary tensions although April and May saw surprising increases. May's year-on-year rate stood at 2.1%, above 2% for the first time since April 2012, while the rate was 1.9% for the core CPI, without energy or food. It should be noted that the Fed's target (2% in the long term, somewhat higher in the current phase of the cycle) does not refer to the CPI but to the deflator for personal consumption expenditures (PCE) whose rate is a little lower, specifically 1.8% year-on-year (1.5% without energy or food).

The labour market provided another pleasant surprise with 217,000 new jobs in May, above the average of 150,000 seen over the three winter months. The unemployment rate held steady at 6.3% but the persistently low participation rate (62.8%) continues to suggest the labour market is far from being fully recovered.

The Fed repeats its commitment to a slow monetary normalisation strategy. The Committee meeting on the 19 June agreed a new step in tapering: a reduction of 10 billion dollars, leaving monthly bond purchases at 35 billion, while also insisting that official interest rates will remain low for some time. The dynamics observed in the labour market and inflation, however, could raise doubts as to whether this will actually be the case. Moreover, the Fed will also have to consider the overheating of some financial markets. In other words, the attention of investors and the rest of the  economic agents will once again be focused on US monetary policy.


Japan's economy suffers a jolt but does not derail. April's VAT hike (from 5% to 8%) seems to have affected it more than expected. In Q1 the economy grew by 1.6% quarter-on-quarter (2.8% year-on-year) boosted by the strength shown by private consumption and investment due to expenditure being brought forward to avoid the VAT hike in force as from 1 April. But just as GDP grew more than normal in Q1, the consensus of analysts predict a sharp contraction in Q2 because of the same distortion, clearly seen in the latest business indicators. Industrial production, which had picked up by 7.6% year-on-year in March, slowed up in April to 3.8% and it was the same situation for retail sales, down by 13% in April after outdoing expectations in March. However, in spite of these fluctuations in indicators, other elements suggest the expansion is still on track: the latest data for the PMI activity and business sentiment index and the good figures for automobile sales in May are promising signs. Nevertheless, the real measure of the effect of the VAT hike on the activity will be provided by the figures in Q3.

Regarding prices, deflation has been left behind although inflation may have peaked. The CPI rose by 3.7% year-on-year in May (3.4% in April) boosted by energy prices and the VAT effect, while the core CPI, without food or energy, repeated April's figure of 2.2%. However, the month-on-month drop in prices for the Tokyo area in June points to inflation being somewhat more moderate over the coming months.


Activity in China consolidates and a soft landing looks likely. Industrial production advanced by 8.8% in May, noticeably more than April's figure and the official PMI posted a slight rise in May (from 50.4 to 50.8) supported by new orders (Markit's PMI also rose, although remaining just below the 50-point threshold). Looking at demand, retail sales accelerated, growing by 12.5% year-on-year, while new bank lending also intensified, encouraged by the government's policies to boost growth (which are also being implemented through fiscal and monetary measures). Inflation is still moderate (May's slight increase to 2.5% year-on-year was due to food prices), leaving room for such expansionary policies.

The correction of imbalances is coming to a halt in some emerging countries considered as vulnerable. The persistence of a current account deficit and high inflation high in Brazil and South Africa (6.4% and 6.1%, respectively) provides no leeway for expansionary policies while their economies are slowing down (GDP growth in 2014 Q1 of 1.9% and 1.8%, respectively). Turkey grew by a healthier 4.3% year-on-year but its high inflation (9.7%) and current account deficit (7.4% of GDP) imply a slowdown is on the cards.

India is also experiencing rising inflation but Marendra Modi's success at the general election has fuelled expectations that growth will speed up to 5%. The likelihood of a stable government and Modi's desire for changes augur genuine reform of the public sector, a more energetic labour market and greater investment in infrastructures. May's 6% upswing in the wholesale price index (India's measure for inflation) was largely expected while the outcome of the elections should bolster the anti-inflationary stance taken by India's Reserve Bank.