The inflation outlook remains benign in the US and Europe, while Japan remains mired in deflation, a...
The inflation outlook remains benign in the US and Europe, while Japan remains mired in deflation, according to Goldman Sachs.
Recovery across most key markets is starting to feed through. However, business surveys indicate better prospects for growth in the UK, while, in contrast, the Japanese economy appears to be languishing in its third recession in 10 years.
Chris Tracey, investment director at JP Morgan Fleming, says March was a positive month for the major markets, but it was not enough to produce anything more than a flat first quarter for global equities.
The star performers for the three months lay in the east, where the MSCI Pacific ex-Japan Index rose 4.4% in dollar terms. Within this, South Korea's Kospi Index ended the quarter up 30.10%.
With all the economic evidence now pointing to a recovery in the global economy, the relief that the risk of a long recession is clearly over has been tempered by the fact the interest rate cycle has now bottomed, says Tracey.
Stephen Potter, economist with Goldman Sachs, says Euroland is showing signs of recovery but there are concerns about its sustainability. The lack of momentum in final domestic demand in early 2002, together with a less pronounced inventory cycle, means Euroland recovery looks weak compared with the US.
Tracey says: 'We expect GDP growth to run at an annualised rate of 1.5% to 2% during the first half of the year, strengthening to 2.5% to 3% during the second half.'
Tracey notes that eurozone business confidence rose to a six-month high in March, although an unexpected rise in inflation led to further interest rate fears.
He says: 'The European Central Bank held rates at 3.25% and the Bank of England did likewise, keeping UK rates at a 38-year low of 4%.'
The strength of incoming data and signs that the inventory correction is well advanced have prompted Goldman's US economists to raise their estimates for 2002 first quarter GDP growth to 5% annualised from 2%.
Potter adds: 'Our big picture view of the US economy is unchanged, though. We see growth tapering off after the first quarter as the inventory correction comes to an end and total domestic demand growth moderates. In particular, consumer spending is likely to be restrained by a sharp fall in mortgage refinancing activity, the recent rise in energy prices and a slower trend for wage compensation.'
Goldman Sachs predicts that average US GDP growth for this year will be 2.4%. Tracey adds that with the oil price rising sharply as Middle East violence intensifies, concern is growing that the recovery may be dampened, with the implication that the Fed will be less likely to hike rates in May, waiting instead for June. He notes: 'However, the bull case for equities is backed by the modest 0.4% annualised rise in aggregate hours worked in the first quarter. Combined with a sharp improvement in output data, productivity growth is likely to be as strong as the 5% annualised advance seen in the final quarter of 2001.
'At the same time, growth in average hourly earnings has dropped back to 3.5% year-on-year from a peak of 4.4% last September. All this adds up to a very sharp boost for corporate margins and profits ' at least on an economic basis.'
Signs of global recovery feeding through.
ECB and BOE hold interest rates.
Inflation signs are benign.
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