Global growth may slow but not stop

IT was a better week for global stock markets, as the heavy losses racked up over the second half of June gave way to a more positive dynamic last week.

Just as the prior sell-off had its origins in concerns about slower global economic growth (among other factors), some encouraging incoming news in recent sessions served to ease such anxiety. The result was that the sharply negative momentum which had built up late last month was partly reversed, with the US S&P 500 up about 5% over the week, for example.

There were several instalments of positive news, including a weekly report on US retailing which recorded a pick-up in sales activity in the run-up to the Independence Day holiday.

Following a disappointing official June employment report the previous week, this helped allay concerns in some quarters about the ability of the US consumer to continue to contribute to recovery.

Further, weekly numbers on jobless claims (the US equivalent of our Live Register) were also better than expected, offering hope that underlying improvement in US labour market conditions is ongoing, if slower than ideal.

In Europe, one notable highlight of the week was a 2.6% monthly jump in the output of the German industrial sector in May. This was considerably stronger than expected and leaves the eurozone as a whole on track for a second quarter GDP performance well ahead of the prevailing consensus forecast of a 0.5% quarterly expansion.

Indeed, in Thursday’s ECB press conference, president Trichet pointed to the strength of the German numbers in support of his view that there is excessive pessimism towards the euro area economy at present.

In his view the incoming information does not provide evidence that the zone is heading for stagnation or a double-dip recession, with the relatively positive skew to his comments also helping support market sentiment.

Britain also had its share of upbeat news, with the NIESR — the British equivalent of the ESRI here — estimating unofficially that its economy grew by 0.7% in Q2, which if accurate would represent its strongest quarter in over two years.

At global level, the IMF also revised up its forecasts for the world economy which it now expects will grow by 4.6% this year, up from 4.2% at the time of its last forecast in April.

However, the IMF also cautioned that the uncertainties surrounding sovereign and financial sector risks in the euro area could spread more widely, and may pose difficulties for both financial stability and the economic outlook.

It also noted that even the upgrade to the 2010 growth forecast incorporated some slowdown in activity in the second half of this year from what looks to have been a firmer than expected first half.

The extent of this slowing is going to be a critical theme for investors. My read of the situation is that while some slowing in momentum from strong levels looks to be inevitable, an abrupt stalling of the global growth dynamic is not.

Some support for this view came on Friday with the latest release of the OECD’s leading indicators, which continue to point to expansion, albeit at a slower pace.

This should offer some comfort to investors, but in reality more evidence on how the major economies are actually faring into the third quarter and beyond will be required to decide this debate.

Simon Barry is chief economist, Republic of Ireland, with Ulster Bank Capital Markets