global economy remains poised for robust growth this year, following on two
years of anaemic growth. Moreover, the prospects for next year are
also positive. While all regions are recovering, the upturn is most
rapid in emerging Asia, particularly China, and the United States, whereas
the Euro Area remains weak. However, the United States economy is
burdened with sizeable deficits in the current account and public sector
balances, which threaten future growth potential. The sentiment for
the Japanese economy continues to improve at a rapid pace, as the actual
development implies a much quicker expansion than anticipated. However,
some fundamental misalignments in the financial sector persist and the
country remains burdened with a deflationary setting. As a result, the
momentum of this year’s recovery is seen to wane in the coming year.
The outlook for the major European economies, on the other hand, remains
sombre. The Euro Area will recover from last year’s sluggishness but
economic growth remains moderate. Finally, Latin America is in for a
robust rebound, as all economies are profiting from increased external
demand for commodities.
economic growth remains robust in first quarter
The preliminary estimates for fourth quarter economic growth released
by the Bureau of Economic Analysis on 27 May did not present a major
surprise. Gross domestic product (GDP) increased at an annual rate
of 4.4% in the first quarter of this year, just slightly ahead of the
advance estimates released last month, which had GDP growing by 4.2% and a
notch short of market expectations, which had anticipated an upward
revision to 4.5% growth. In the fourth quarter, the economy grew
4.1%. The acceleration in GDP growth compared to the fourth
quarter primarily reflected a pickup in federal government spending and
private consumption supported by a deceleration in imports. These
accelerating effects were partly offset by a slowdown in exports and in
investment in equipment and software.
price increase unlikely to derail US economy
With the numbers coming in as expected, the Consensus Forecast for
this year’s growth prospects of the US economy did not change over last
month’s 4.6% forecast.
In fact, the Consensus has remained virtually unchanged since
February, despite some important changes in the fundamentals underlying
the development of the global economy.
In particular, the recent sharp increase of the oil price raises
doubts about the previous optimistic assessment of global economic growth
In part, the price spikes that took the oil price beyond the US$ 40
threshold are not yet factored in into current forecasts since they
occurred very recently.
And even if these higher prices are taken into account, the impact
on the US economy is uncertain, as the growth momentum is now so strong
that it would take an even stronger oil price increase to derail the
Finally, it is unclear whether the oil price will remain at the
On 3 June, the Organisation of Petroleum Exporting Countries (OPEC)
decided to increase production quotas by 2 million barrels per day
beginning 1 July with an additional 500,000 barrels per day increase
starting 1 August.
While the increase was below market expectations, it was sufficient
to stall the upward trend at least for the time being, as the lifting of
the quota was accompanied by news that US gasoline and crude inventories,
which are viewed as a barometer of global crude inventories, showed a
Consequently, on 4 June, the price for West Texas Intermediate
(WTI) had dropped to US$ 38.49 per barrel after having reached a high of
US$ 42.33 on 1 June.
confidence drops despite new jobs as concerns about rising inflation and
interest rates mount
American consumers seem unperturbed by the oil price increase but fear
that higher inflation and interest rates will weaken their financial
situation significantly and slow the pace of economic growth in the year
As a result, consumer confidence declined in May according to the
University of Michigan’s Survey of Consumers. In
fact, Consensus Forecast panelists share the consumers’ pessimism about
the development of inflation and have lifted their year-end forecast by
0.3 percentage points since last month to the current 2.2%.
The survey states that rather than a shift toward pessimism, the
data indicate a continuation of the longstanding trend of mixed sentiment
about the economy.
However, assessments appear to be shifting, as consumers now have
more favorable expectations about employment prospects and less favorable
expectations about inflation and interest rates, the opposite of what has
occurred over the past few years.
That said, consumer confidence remains strong enough to support the
robust expansion presaged by the Consensus Forecast.
The increased consumer optimism about the employment situation is
supported by actual developments.
In May, US employers added 248,000 new jobs, compared to a 216,000
increase expected by the market, following an upward revised total of
346,000 jobs in April and 353,000 in March. Virtually
every major private sector of the economy added jobs in May.
As a result, the economy created 947,000 jobs in the March-May
period, which was the strongest three-month stretch in four years.
The unemployment rate, however, remained unchanged from April at
5.6% in May.
for Japan improves markedly
Japan once again experienced a significant increase in optimism about
this year’s growth prospects.
The Consensus Forecast for 2004 GDP growth jumped half a percentage
point from 3.1% expected last month to 3.6%.
The upward revision reflects continuous positive surprises in data
In the first quarter, the Japanese economy expanded 5.6% over the
same period last year (+1.4% seasonally adjusted quarter-on-quarter).
The first quarter reading was well ahead of market expectations,
which had the economy growing by less than 4%.
So far the recovery was almost exclusively driven by the external
However, in the first quarter, domestic demand appeared to be on
Better job prospects are fueling consumer spending, which accounted
for more than a third of the expansion and represented the biggest source
of growth, overtaking business investment, which made up about a quarter. Unemployment
dropped to a three-year low of 4.7% in March.
More recent data suggest that the recent upswing continued into the
In April, unemployment remained at the March low, down from 5.4% a
year earlier, and industrial production surged by 8.5% year-on-year, the
fastest pace in over a decade.
continues to lag behind
Sentiment is even improving for Europe, where the Consensus lifted the
GDP forecast a notch over last month.
However, the Euro Area is clearly lagging behind other economic
regions on its way to recovery and despite the small upward revision, the
regional economy will expand a paltry 1.7%, less than half the pace
anticipated for Japan and leagues behind the resilient 4.6% growth rate
expected for this year in the United States.
However, the expansion is seen as accelerating.
In the first quarter, the Euro Area GDP grew by 1.3% over the first
quarter 2003 and 0.6% over the previous quarter.
For the second quarter, the European Commission’s indicator-based
model for quarterly GDP growth, forecasts a range of 0.3% to 0.7%, which
should be accelerating further to a 0.4% to 0.8% range in the third