Perhaps all this nice weather we have been enjoying has gone to my head – or, better still, to everyone else’s too – but there appear to be more and more signs of economic recovery in a number of developed Western economies, including the UK’s.
I wouldn’t want to get overly carried away or be dismissive of the remaining cyclical and structural challenges out there, but recent data have definitely taken a turn for the better in the UK and euro area and, of course, it has been that way in Japan and the US for a while now.
Before I turn to the evidence, let me state for the avoidance of doubt the obvious challenges that remain.
The euro area’s structural problems could burst open at any moment, particularly after the German elections in the autumn, and we have to remain braced for that.
After the elections there are likely to be more frank discussions on a number of significant underlying issues, such as a banking union, eurobonds and, of course, the seemingly neverending austerity in a number of Mediterranean countries.
In Japan, the improved mood could be undone through either an early push to raise consumption taxes significantly or, indeed, the absence of any plan to deal with their huge fiscal debts, as well as a sudden abrupt recovery of the yen.
In the US, underlying fiscal challenges remain. The challenge posed by a lessening of the Federal Reserve’s quantitative easing through an early tapering – never mind the day when the Fed starts raising interest rates – will be significant.
Geopolitical uncertainties persist, especially in the Middle East, and, related partially to this, fears of a fresh surge in oil and other commodity prices are other obvious things that could go wrong.
All of these things could derail signs of recovery here and elsewhere – and, in our case, we have debt and rebalancing challenges to deal with. But these risks haven’t prevented some more recent signals getting brighter. When the provisional 0.6pc quarter-on-quarter real GDP rise for Q2 was announced, some observers thought this was partially distorted and things would slow in Q3. But it was the second consecutive quarterly rise, something that, since 2008, has become rare.
But the July indicators include some very robust signals, especially all the monthly purchasing managers’ indices (PMI indicators). Each of the three, for construction, manufacturing and services, showed very strong performances, with the services index rising to 60.2, the highest since November 2006.
If the July momentum of these three indicators were representative of underlying trends in the economy, then this would suggest an acceleration – possibly significantly – beyond Q2’s 0.6pc rate and suggest that something has finally changed for the better out there. As I said, it is premature to get too carried away, but these are certainly encouraging signals.
To add to this flavour, the US July manufacturing ISM – their equivalent to the PMI – rose much more than expected to 55.4. Their services ISM also rose more than expected and, in a particular piece of good news, the latest trade balance declined to $34.2bn (£22bn), a number that suggests the US can grow decently without sucking in so many imports compared with exports. This suggests the US is adjusting its economy as well as growing.
Just as encouragingly, the eurozone PMI returned to positive territory, jumping to 50.3, with evidence of more countries than just Germany experiencing this improvement. The euro area’s services PMI was not as robust but it also showed a further decent rise and contributed to the so-called Composite PMI – an aggregate of the manufacturing and services indices – jumping to 50.5, the best in the euro area for 24 months.
What can be behind this reasonably sudden Western recovery, especially as the breadth of the countries showing the signals is wider than we have seen since the 2008-09 collapse?
I can think of three things. First, some of it might just be plain old “animal spirits” as consumers and companies stop postponing decisions that at some point in the future they would have to make. That would only really make sense if it were linked to some other factors. A second one might be the easing of many commodity prices over the past few months, especially for food and energy, which at the margin might have made both consumers and commodity price-sensitive producers feel a bit better off.
A third factor – though less easy to observe – could relate to changing relative competitiveness between the developed and emerging world.
Rapidly rising wages in the likes of China and elsewhere might be helping the net trade position of a number of countries. Not only would this help boost exports but it might also lead a number of companies wanting to produce more at home than overseas; this might happen slowly but will possibly be a more lasting factor.
Some weeks ago, I raised the possibility that more challenging conditions in the emerging world might actually have some positives for us by lessening upward pressures on many commodity prices as well as improving competitiveness, and this is indeed looking important.
Not that we should be writing off the larger emerging economies, especially China. As I argued a fortnight ago, if they grow by 7.5pc instead of 10pc, or perhaps even a bit less, it will be even better for us – so long as their consumer spending stays strong or strengthens further. In this light, China’s own monthly PMI indicators also showed a slight improvement in July in both manufacturing and services.
Another factor might start to help more, and certainly reduce one of those risks of things going wrong again, or at least too early. In a number of countries, a new fashion has burst out among central bankers, namely “forward guidance”, which is simply a fancy term to explain that central bankers won’t start raising interest rates until certain conditions have been met – in many cases, unemployment falling quite a bit further.
Here in Britain, Bank of England Governor Mark Carney led his colleagues into their own version of forward guidance this week, suggesting current policies will stay in place until unemployment drops below 7pc, something they think is probably not going to happen until 2016.
So, as many of us enjoy our annual summer holidays, people may be feeling brighter than for a while. Let’s hope it stays that way into the autumn.
Jim O’Neill is former chairman of Goldman Sachs Asset Management and chairman of education charity Shine (www.shinetrust.org.uk)
Read more: http://www.businessinsider.com/jim-oneill-forces-behind-the-sudden-western-recovery-2013-8#ixzz2bf5fTI7p
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