Europe could signal sturdier rebound
London, August 12, 2013
By Andy Bruce
A tentative view that the global economy is emerging from its lull could harden into conventional wisdom by the end of this week if, as expected, data show the euro zone's lengthy recession has ended.
While Europe is still the world's biggest trading region, some of its recent major exports - financial market panic, banking scares and political uncertainty - have dragged on the world economy over the last three years.
There are now signs of a nascent recovery, led by Germany and perhaps Britain.
Wednesday's data are expected to show the euro zone economy grew 0.2 percent in the second quarter, according to a Reuters poll. That would mark an end to the recession that took hold in late 2011.
That won't change the US position as the main engine of economic growth in the world, at least until next year, with Chinese growth still slowing and India wracked by a currency in free-fall.
But even the smallest sign of a recovery in Europe augurs well for the rest of the year.
"Add it all up, and it's a more positive picture for the global economy late this year and next," Mark Zandi, chief economist at Moody's Analytics, said.
"It feels like the global economy is stabilising, and by year's end, certainly as we move into next year, growth will be accelerating, led by the US."
"But I also anticipate some growth out of Europe and stable growth out of the emerging world."
Business surveys last week supported that view as companies in the US and Britain prospered, while there were signs Chinese firms might have passed the worst of their mid-year lull.
In the past, however, similar indications of global recovery have emerged, only for that recovery to be trampled.
Europe's major economies showed signs of improvement in early 2011, even while the sovereign debt crisis in the euro zone was worsening.
Two interest rate hikes from the European Central Bank midway through the year led to a chokehold on credit, especially in southern Europe, and turned the risk of another euro zone recession into an inevitability.
GUIDE TO THE FUTURE
Central bank policymakers are determined not to repeat that mistake, as evidenced by the adoption of forward guidance at the Bank of England and European Central Bank.
Minutes from the BoE's August meeting on Wednesday will shed more light on Governor Mark Carney's plan to link its policymaking to an unemployment rate threshold of 7 percent, subject to caveats on inflation and financial stability.
"Much like the ECB, the BoE is worried about the effect of tighter global financial conditions on the fragile recovery taking root in its jurisdiction," said Gustavo Reis, global economist with Bank of America-Merrill Lynch.
"With the Federal Reserve likely to start reducing the pace of asset purchases this year, European forward guidance aims to anchor market expectations and mitigate the impact of negative policy spillovers."
There are risks to forward guidance, too.
In June, US Fed chairman Ben Bernanke signalled the Fed was thinking about easing off the pace of its monetary stimulus later in the year.
That talk prompted a reaction in financial markets that really amounted to an unexpected de facto monetary tightening, with government bond yields rising and the dollar rising sharply in the second half of June.
Fed officials have been more careful in their language since then.
That won't be lost on ECB President Mario Draghi, who has refused to elaborate on his guidance that the bank intends to keep interest rates low "for an extended period of time".
Zandi from Moody's Analytics said that forward guidance will prove critical in allowing the European recovery to take hold.
"I think the BoE did the right thing in adopting unemployment thresholds similar to the Fed's thresholds, and I think the ECB eventually will get there," he said.
"I think it's difficult for Draghi to go down the path Carney has, but he'll go down the path - it'll just take him longer to get there." - Reuters