Economic outlook: Momentum declining, but upswing not in danger

Recent days have had something to offer for both pessimists
and optimists in regard to releases of economic data. At any
rate, economists appear to have divided into two camps in
the past months. On the one side are the optimists, who
make the basic assumption that out of the artificial upswing
induced by anticyclical monetary and fiscal policy, a selfsustaining
upswing is developing and will continue next
year. On the other side are the pessimists, who point to
sluggish lending in the United States and Europe and infer
that at least monetary policy has so far had little positive
effect. Moreover, the pessimists argue that the announced
austerity programs, including especially those in Europe,
might choke off growth and thus cause a relapse into recession.
As evidence for this, they cite the halting development
on the US labor market or the disappointing development of
US private housing and commercial property.
In our opinion, the truth lies, as is so often the case, somewhere
in the middle. It can scarcely be disputed that a
self-sustaining upswing with remarkable momentum has
been observed, but it is equally true that not all the data
now available put the world in a rosy light. On the other
hand, it is fair to ask when an economic upswing has ever
been accompanied by exclusively positive news and outlooks.
There have always been impeding factors, and all
good things come to end.
It is therefore a little surprising that in recent days, the fly in
the ointment has been sought in the economic indicators,
when in principle the released data were positive. A good
example of that is the Ifo index.
Perhaps Europe’s most important leading indicator, the Ifo
index has increased again in June and now also reached a
high index value compared with its own history. Many
commentators nevertheless warn that the expectations component
has fallen despite an impressive rise in the rating of
current conditions. This picture was repeated upon the
release of the PMI indexes for Europe’s manufacturing and
services sectors. Instead of acknowledging that the indexes
show impressively high levels significantly above the crucial
50-point threshold, the complainers point to a marginal
decline in relation to the preceding month. The same was
also true, by the way, of the Belgian National Bank’s important
leading indicator (BNB index) and of French business
sentiment. On the other hand, little or no notice has
been taken of the fact that German business sentiment has
in June also seemed largely unimpressed by the gyrations
on the markets, the debt crisis in Europe, and the debates
over the austerity packages. Even a growth rate for industrial
orders in the euro area of 21% compared with the yearearlier
month has not aroused any enthusiasm, although that
is the highest growth rate in the last ten years.
We have the impression that as a result of the recent crises
and gyrations, too may market participants have become
conditioned to seek only the “critical points” for any state
of affairs. That may be understandable given the experience
of recent years, but in the long run it does not yield a successful
asset allocation, when for an analyst or portfolio
manager the glass is always half empty and never half full.
So, it may now be that economic momentum has reached or
even passed its peak, but that certainly does not mean that a
slide into the next recession will now inevitably begin.
Instead, the past shows that after stormy economic upswings,
the economy is often able to grow for years near the
rate of potential growth without the next downswing occurring
immediately. In the language of an airplane pilot, one
could say that the economy has now reached its cruising
speed and altitude, after takeoff was accomplished with an
exceptionally great amount of thrust. However, there is no
reason, in our view, that the cruising elevation must already
be left again soon.
Of course, it cannot be rationalized away that the austerity
packages will have a negative effect on growth, especially
in Europe. However, we already pointed out some weeks
ago that, for example, the German “austerity package” (the
name is somewhat misleading because the package really
consists to a considerable extent of tax hikes) will not have
any dramatic influence on growth because of both its size
and its structure.

Category: Debt & Financial Services