GDP wincing all over the world

Despite major economies doing all they can, GDP data has made for sorry reading. Commodity prices will indicate whether sustainable growth can be found any time soon.

The global recovery has faltered. The recent run of GDP data and updated forecasts for the global economy do not make for great reading.

While the general themes remain of a strong Asia, a mediocre North America, a depressed Europe, UK and Japan and solid news in South America, Eastern Europe and Africa, there has been a general tendency for most of the recent GDP growth numbers to be on the disappointing side in all corners of the globe.

It is especially disappointing when the world is meant to be climbing out from the deepest and most protracted economic downturn since the 1930s Great Depression, helped by rising stock prices and easy policy. Indeed, the recent news is all the more problematic given that monetary policy has, in many instances, been set with interest rates that are effectively zero for four or five years while at the same time, central banks have been printing many trillions of dollars as they try to ignite a sustained economic recovery.

March quarter GDP in the US and China, with both countries accounting for over one-third of global output, were disappointing.

The US economy grew at an annualised rate of 2.5 per cent in the March quarter, a fair result at face value. When the result is put in the context of a very tepid 0.4 per cent rise in GDP in the prior quarter, it is much less impressive. In other words, annualised GDP growth in the last six months in the US is under 1.5 per cent. Ouch! The March quarter data also undershot most expectations which were for GDP growth above 3 per cent.

The news from the US follows the less than spectacular growth rate from China where GDP rose 7.7 per cent in the March quarter against expectations for an expansion of 8 per cent or more.

While not all Eurozone countries have reported their March quarter GDP data, it looks like Europe will be lucky to register zero growth. Some forecasters are actually looking for GDP to fall 0.3 per cent and signal a continuation of the rolling recessionary conditions. In recent weeks, the European Central Bank, the IMF and others have joined the camp which is forecasting GDP to fall right through 2013. This is a point that has many analysts expecting the ECB to belatedly cut interest rates after its meeting this week.

In Japan, it is clearly too early to see any evidence on economic growth from the mass stimulus measures from Prime Minister Abe and the Bank of Japan but with GDP falling at an annualised rate of over 2 per cent in the second half of 2012, the contribution to global growth from the world’s fourth largest economy is unlikely to be meaningful in the early part of 2013.

The UK had what might be the only bit of good GDP news. Well, that is good relative to dismal expectations. As I wrote here last week, the 0.3 per cent GDP growth rate recorded in the March quarter was good only in as far as it seemingly averted a triple-dip recession and it beat expectations for growth of just 0.1 per cent. It is hardly strong (Agony in the UK, April 29).

My favourite barometer for global growth remains changes in commodity prices. Aside from what may be important supply side issues, it is safe to say that when commodity prices are sustaining a move higher, it is likely that global industrial output and with it economic growth is also on the rise. The opposite is likely to be true when commodity prices are weakening.

In the last few months, commodity prices have been flat to down which reinforces the generally disappointing hard economic news on global GDP. Copper prices, for example, are down 15 per cent over the past three months, while oil prices are generally softer as well. The price of iron ore is off its recent highs while other so-called industrial commodities are also down some 5–15 per cent.

It is too early to say definitively that the global economy is heading towards another serious slump. Policy is just so easy and the central banks of the world seem hell bent on avoiding a major downturn at all costs. That said, the recent news is less than rosy and there needs to be an upturn in some hard data and key commodity prices before we can be sure that another hard landing has been averted.

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