Recent data from the US have suggested the world’s biggest economy is recovering. While this has enlivened financial markets in the past couple of months, the pace of recovery remains a cloudy issue. The UK economy is expected to return to growth in the third quarter; Germany is expected to have increased momentum; eurozone purchasing manager indices are expected to have shown some improvement.
In the US, much depends on how much momentum was lost following the second-quarter slowdown. Economists at the commerce department revised down the initial April-June gross domestic product reading of 1.7 per cent last month to 1.3 per cent, following the worst drought in half a century. This resulted in massive drops in farm inventories, while consumer and business spending was also weaker than initially estimated.
“Importantly, the global economic slowdown continues to have a non-trivial impact on capital expenditure,” says Michael Cloherty at RBC Capital Markets.
“With the uncertainty around the presidential election and the fiscal cliff quite palpable, we would not be surprised to see growth continue to soften into the fourth quarter.”
Friday’s GDP data are expected to show annualised US growth of 1.8 per cent in the third quarter, with personal consumption growth of 1.8 per cent also.
The UK economy is expected to return to growth in the third quarter, having contracted in the previous three. But, just as second-quarter data were skewed lower by the extra public holiday for the Queen’s diamond jubilee, the third quarter’s were likely to have been exaggerated a little by the London Olympics.
Thursday’s data are forecast to show that the economy expanded 0.6 per cent on the quarter, but remained down 0.4 per cent on an annualised basis.
“The UK still has a very tough job in developing significant sustainable growth given tighter fiscal policy, ongoing serious problems in the eurozone and generally soft global growth,” says Howard Archer at IHS Global Insight.
Plenty of clues are available on the development of business activity in the eurozone this week, with purchasing manager surveys on both the manufacturing and services sectors published on Wednesday.
Germany is expected to have increased momentum, although its manufacturing sector – the engine of growth in the eurozone – is likely to remain in contraction territory. Overall, eurozone purchasing manager indices are, likewise, expected to have shown some improvement, with the manufacturing index rising to 46.5 from 46.1 last month and services up to 46.4 from 46.1. Critically, however, both indices are firmly below the 50 level that indicates economic expansion.
Germany’s Ifo business-expectations index has not risen for the past six months, but on Wednesday is seen creeping higher thanks to recent equity market gains and easing of eurozone tensions.
Also out in the US this week, durable goods orders for September are seen rebounding strongly after lower or cancelled aircraft orders crippled the August reading. Meanwhile, new home sales in the same month are seen climbing 2.1 per cent month on month.
The Federal Reserve’s October meeting on Wednesday comes as something of a sideshow after it instigated a number of new measures at its September 13 meeting, including the $40bn-a-month open-ended asset purchase scheme. The Fed funds rate is fully expected to remain at between 0-0.25 per cent.
Central bank policy meetings are also being held in Sweden and Canada this week. The Riksbank is expected by many to cut its main repo rate to 1 per cent from 1.25 per cent on Thursday. And, while the Bank of Canada is not expected to alter its 1 per cent policy rate, it is expected to shift from its previously hawkish bias to a more neutral stance.