A good news day yesterday for the global economy.
American is levelling out, says the Fed, Germany and France have boosted to hopes that the eurozone is on the way back from deep recession and next week Japan should join them with some positive second quarter growth figures of its own.
China this week reminded us that its economy is still growing (however strongly that may be); Singapore upgraded growth and so has South Korea.
Growth estimates here in Australia has also been lifted by the Reserve Bank and the NAB, with the forecasts moving from the negative for 2009 to expectations of small gains.
It seems the Second Greatest Recession ever is no longer, green is now the official colour of those shoots, some of which could be developing into stalks.
Europe was considered the laggard, so the news that the region’s largest members say their economies grew in the second quarter after shrinking for a year, was a big surprise..
Economists had been expecting both economies to contract again by 0.2% – 0.3% – after German gross domestic product fell 3.5% and French GDP shrank by 1.3% in the first quarter.
But in the 16-nation euro zone, GDP slid by 0.1% in the quarter, following the 2.5% first quarter fall.
That, though, was well above the 0.5% fall forecast before the French and German figures were released.
Both recorded growth of 0.3%, thanks to heavy Government spending in the two countries.
Britain now looks in relatively poor shape, its economy having shrunk by 0.8% in the second quarter after 2.4% in the March three months.
Italy, the euro zone’s third largest economy, reported last week its economy dropped by 0.5% in the second quarter.
Austria shrank by 0.4% in the second quarter while the Netherlands contracted by 0.9%.
Year-on-year, Germany shrank by 7.1% in the second quarter, the data showed, following a 6.4% drop in Q1.
The euro rose, as did German and other European shares.
The US economy is levelling out, according to the Fed.
Wall Street dined out on the Fed’s statement yesterday morning, rebounding from the biggest fall in a month the day before. Basically the sentiment went: "It’s over, Fed says it’s over’.
But the markets went a little quiet in the US on Thursday when home foreclosures rise last month and weak retail sales took investors by surprise.
The market has been bouncing higher now for months as risk is rediscovered, all the bad old trading habits emerge (such as mispricing home mortgage-backed securities which are now hot, after nearly causing the entire US economy to implode).
Commodities are rising, speculators are being pilloried by politicians and the US deficit is growing while thankless bankers take home billions of dollars in compensation, all financed by the lowest interest rates on record from a generous Fed. Oil touched $US71 a barrel overnight.
The Fed in its statement make a significant change to the tone of its end of meeting statement by acknowledging the US economy is doing better and not going to hell in a hand basket.
“Conditions in financial markets have improved further in recent weeks.
"Household spending has continued to show signs of stabilising but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.
"Businesses are still cutting back on fixed investment and staffing but are making progress in bringing inventory stocks into better alignment with sales.
“Although economic activity is likely to remain weak for a time, the committee continues to anticipate that policy actions to stabilise financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability”.
"The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."
Not quite: after all, leaving interest rates at their current record low is not exactly a vote in confidence that the US economy is coming back in a big way, let alone regaining the levels of 2008 or 2007.
And yet the S&P 500 is within 16% of its level when Lehman Brothers crashed 11 months ago, when rates were higher (They were slashed to the present 0%-0.25% level at the December meeting as world markets trembled).
The Fed cheered markets by saying that it will slow the pace of its $US300 billion program to buy US Treasuries and anticipates that the full amount will be purchased by the end of October, not September as previously stated.
“To promote a smooth transition in markets as these purchases of Treasury securities are completed, the committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October,” the Federal Open Market Committee said in the statement.
But while that’s helped pump $US258 billion into the US economy in what’s called Quantitative Easing, it hasn’t held US interest rates down: they’ve risen from around 2.50% for the 10 year bond around March 18, when the Fed announced its policy switch, to a high of
