Global economy shows some signs of life

By Rich Miller

Growth in the world economy should hold up if Europe's debt crisis can be contained. Photo / Christine Cornege
Growth in the world economy should hold up if Europe's debt crisis can be contained. Photo / Christine Cornege

The global economy is showing signs of withstanding a European recession triggered by the debt debacle in Greece.

The US unemployment rate fell to 9 per cent last month, the lowest since April, from 9.1 per cent in September.

Chinese manufacturing continued to expand in October. Even in Japan, the world's third-largest economy, growth is coming to life: Gross domestic product climbed last quarter for the first time in a year, rising 6 per cent according to the median estimate of analysts polled by Bloomberg News.

"Barring Italy turning into Greece, we'll have a slowdown in the world economy, but a manageable one," said Jim O'Neill, chairman of Goldman Sachs Asset Management in London.

The cool-down will bring with it "some not-to-be-dismissed benefits, particularly in easing inflationary pressures," he said. That easing will boost the spending power of American consumers and give officials in China and other emerging markets room to loosen fiscal and monetary policy.

The ability of the US to avoid a contraction means the greenback probably will appreciate against the European currency, BS Investment Bank Chief Economist Larry Hatheway and his team in London wrote in a report.

They see the euro falling to US$1.25 by the end of next year as global growth slows to 3.1 per cent in 2012 from 3.2 per cent this year.

The US stock market also will benefit, said David Kotok, chairman and chief investment officer of Cumberland Advisors in New Jersey. He forecast the Standard & Poor's 500 Index will finish the year at 1350, compared with 1261 yesterday.

"The bear is going into hibernation for the winter, and the surprise will be to the upside," Kotok said. He is "fully invested" in the US markets and "very underweight" in Europe, he said.

European Central Bank President Mario Draghi said the region was heading towards a "mild recession" after policy makers cut their benchmark interest rate by a quarter percentage point to 1.25 per cent.

The euro area's gross domestic product will shrink at a 0.5 per cent to 1 per cent annual rate this quarter and next before recovering in the second half of 2012, said Allen Sinai, president of Decision Economics in New York.

Europe's malaise is already taking its toll on the rest of the world economy. South Korea's exports increased at the slowest pace in two years last month, partly because of the European debt crisis, and may slow further in the fourth quarter, said the Ministry of Knowledge Economy.

LG Electronics, the world's third-largest maker of mobile phones, reported it lost 414 billion won ($466 million) in the three months ended September, as earnings dropped at its flat-panel unit. The Seoul-based company had a profit of 7.6 billion won in the 2010 third quarter.

Banks in emerging markets also feel the pinch as European counterparts seek to increase their capital base by cutting back on international loans. A survey of banks in developing countries by the Institute of International Finance found that their "funding conditions in international markets have deteriorated significantly".

Still, the world economy as a whole has proved to be resilient after the mid-year shock to confidence from the crisis in Europe and squabble in the US over raising the Treasury debt ceiling, said David Hensley, director of global economic co-ordination at JPMorgan Chase in New York.

Purchasing managers at manufacturing firms around the world reported business improvement in October. The aggregate index increased to 50 last month from 49.8 in September; results above 50 indicate expansion.

The data suggests the risks of a synchronised global contraction "continue to diminish", Neal Soss, chief economist at Credit Suisse Holdings in New York and his colleague Henry Mo, wrote in a report.

"At the moment, we don't see recessionary situations as we assess the markets," said Rich Kramer, chief executive officer of Goodyear. Third-quarter net income of US$161 million ($202 million) topped the analysts' estimates; the largest US tyre maker reported a loss of US$20 million a year earlier.

Sales of cars and light-duty trucks rose 7.5 per cent last month from a year ago to a 13.3 million seasonally adjusted annual rate, the most since February.

After cutting back on saving and increasing spending, consumers should get a boost this quarter from falling inflation, Hensley said. He sees consumer prices rising at an annualised pace of just 0.5 per cent in the final three months of the year, down from 3.1 per cent in July-September.

The average price for unleaded petrol fell almost 20 cents in September to US$3.43 a gallon and held near there last month, according to AAA, the nation's largest motoring group.

US households also are benefiting from smaller debt payments, thanks to record low interest rates from the Federal Reserve and their own efforts to put their finances in better shape, Sinai said. As a share of disposable income, those payments fell to an almost 17-year low of 11.09 per cent in the second quarter from a peak of 13.96 per cent in 2007, based on Fed data.

The course of consumer spending next year hinges on the US Congress. A 2 per cent cut in workers' payroll taxes is set to expire at the end of this year.

President Barack Obama has proposed extending it as part of his US$447 billion jobs plan. Lawmakers have yet to act on the proposal.

Ebbing inflation also will be welcome news in China and other emerging markets, where policy makers have been struggling to contain price pressures.

"From the truly global perspective, the most important thing for me is not the next development in Europe, barring a breakdown in Italy, but what happens to Chinese inflation,"O'Neill said.

The country's central bank raised borrowing costs five times and boosted lenders' reserve requirements nine times in the past 13 months.

Chinese inflation may moderate to less than 5 per cent in November and December, compared with a three-year high of 6.5 per cent in July, said Zhu Jianfang, the most accurate forecaster of the data in Bloomberg News surveys during the past two years.

"Food and global oil prices have peaked, and that means inflation will fall," said Zhu, a Beijing-based economist at Citic Securities.

"The decline will leave more room for policy easing, such as looser credit, to help sustain growth."

Manufacturing in China expanded last month, albeit at a slower pace. The Purchasing Managers' Index fell to 50.4 in October from 51.2 in September, the China Federation of Logistics and Purchasing said.

Some central banks are already easing policy. Brazil cut interest rates for the second time this year on October 19, lowering the benchmark Selic rate to 11.5 per cent. Bank Indonesia reduced its key rate by 25 basis points to 6.5 per cent on October 11, paving the way for the biggest monthly gain in the country's sovereign-bond market since March.

Asian policy makers "have a lot of room" to cut interest rates and expand fiscal policy, said Robert Subbaraman, chief economist for Asia excluding Japan at Nomura Holdings in Hong Kong. "Asia's public debt-to-GDP ratio is among the lowest of all the regions."

In Japan, Prime Minister Yoshihiko Noda is proposing a third extra budget that the Cabinet Office estimates will increase GDP by about 1.7 per cent. The budget, which will pay for rebuilding after the March earthquake, also will create about 600,000 jobs, the office said.

The effort "is well timed," said Cameron Umetsu, senior economist at UBS Securities Japan in Tokyo.

"It helps to cushion some of the pain, and in that sense lends a certain degree of independence to the Japanese recovery."

Sinai sees global growth holding roughly steady next year at just under 3 per cent, adding that his forecast that the world recovery would stay on track assumes Europe would contain the contagion from Greece's debt crisis.

There are precedents for the world economy's ability to hold up in the face of a European recession. Perhaps the most relevant, according to economists at the Washington-based Institute of International Finance, is the early 1990s, when a European Monetary System crisis drove the area into recession without derailing a US recovery.

"In my 30 years in the business, Europe's never been the locomotive" of the global economy, O'Neill said.

"The contagion from Europe to the US and China as the two key engines of the world is being exaggerated."

* US unemployment rate drops, from 9.1 per cent to 9 per cent.
* Japan's GDP rises by 6 per cent.
* World index of manufacturing purchasing rises.
* US car sales up 7.5 per cent in October.
* Inflation in China and US expected to diminish.

- Bloomberg

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