Update on U.S. and European Economies by The Conference Board Chief Economist Bart van Ark
Continued Modest Growth This Autumn Remains the Most Likely Scenario
Following up on last week’s communication on the risks of recession in the wake of turmoil in the global financial markets, we now have more data points to assess the current and near-term economic situation in the United States and Europe.
This morning we released The Conference Board Leading Economic Index® for the United States, which rose by 0.5 percent in July, after a 0.3 percent increase in June, and a downwardly revised 0.7 percent increase in May. These readings point to the possibility of a little more growth by the end of summer. We don’t think the recent volatility in financial markets (not reflected in today’s number) will change that picture significantly.
As expected, the Leading Economic Index for July is strongly driven by financial indicators (such as money supply, the yield spread, and stock prices). The non-financial indicators are considerably weaker. Indeed a sub-index of the LEI, which excludes the financial indicators, reflects the ongoing weakness in the non-financial sector of the economy.
However, this is still very different from the economy “falling off the cliff.” Recent data for July include a little more strength in retail sales (excluding vehicles and gasoline); a continued rise in consumer spending power; stable, but moderate investment growth; and a slight weakening in what had been strong export growth. Also, this morning’s numbers on inflation in July suggest a slight edging up in consumer prices, though largely driven again by food and energy prices as in the beginning of the year. Separately, our model of recession probabilities, including some of the latest measures for early August, shows that the chance of recession is about 1 in 3.
On Tuesday, the latest output growth numbers for the Euro Area caused some stir in financial markets, as second-quarter growth came in at 0.2 percent (about 0.8 percent, annualized) over the previous quarter. While this fell somewhat short of expectations, especially because of the disappointing performance in the largest economies, France and Germany, the growth performance of Italy (0.3 percent) and Spain (0.2 percent) was reasonable, and some other smaller economies, such as the Nordic countries, Austria and Belgium, have been doing quite well.
Weak confidence in the core economies seems an important driver of the underperformance of the core economies, and especially in Germany a softening in exports to emerging markets (notably China) may also play a role. With an increased possibility of weaker growth in Europe during the third quarter, and with the slight moderation in inflation (down to 2.5 percent in July from 2.7 percent in June) the ECB is likely to keep interest rates at their present levels. This means that monetary policy will remain highly accommodative for countries like Germany, supporting construction and investment going forward.
Our next Euro Area LEI release covering July is scheduled for August 26th
Implications for the global growth outlook
Global growth is likely to be a bit more disappointing during the second half of 2011 than anticipated and may fall somewhat below 4 percent. This is partly because the advanced economies will realize little-to-no upward potential. In addition, the largest emerging economies (Brazil, China, and India) aren’t making up for it in terms of accelerating growth, and may even slow somewhat. Still, the economic circumstances are very different from 2008, when we were coming out of a boom period and taken by surprise by the seriousness of the downturn. The current volatility in the financial markets, including today’s plunge relative to the rallies of previous days, is in itself a reflection of the realization that the global growth environment has been weak, and will remain so for a while to come.