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Shocks Slow Global Growth Sustained by Labor Gains, Profits

IMF Managing Director Dominique Strauss-Kahn
IMF Managing Director Dominique Strauss-Kahn. Photographer: Seokyong Lee/Bloomberg

The global economy is cooling, in a shift that will slow, not stop, the worldwide expansion.

Growth is decelerating in the two largest economies as finance ministers and central bankers gather in Washington for the semi-annual meeting of the International Monetary Fund and World Bank starting today. Higher gasoline prices have sapped consumer spending in the U.S., while tighter monetary policy has curbed demand in China. Japan, the world’s third largest economy, is struggling to right itself in the wake of a record earthquake, while Europe is battling a debt crisis that claimed its third victim -- Portugal -- last week.

“The headwinds we’ve run into are pretty strong,” said David Hensley, director of global economic coordination at JPMorgan Chase & Co. in New York. “The fundamental forces driving the recovery have not been stopped. We’re bending but not breaking.” JPMorgan Chase sees growth of 4.2 percent this year, down from its 4.7 percent forecast in January.

The enduring expansion means that global stock markets are still a buy, even as the world economy “loses some of its acceleration,” said Jim O’Neill, chairman of Goldman Sachs Asset Management in London. “The bull market in equities continues,” he said. He sees the Standard & Poor’s 500 Index rising to between 1,400 and 1,450 by the end of the year from yesterday’s close of 1,314.52.

‘Really Under Way’

The IMF argues that the rebound has become “more self-sustaining” as increasing private-sector demand replaces waning public support in promoting growth, according to its World Economic Outlook issued this week.

“This is not a time for complacency, but the good news is that the recovery is really under way,” IMF Managing Director Dominique Strauss-Kahn said yesterday in an interview on Bloomberg Television’s “InBusiness” with Margaret Brennan. The Washington-based lender forecasts world growth of 4.4 percent this year and 4.5 percent in 2012, after 5 percent in 2010.

Expansion expectations nevertheless fell for a second consecutive month in April, according to a Bank of America Merrill Lynch survey of fund managers published this week. Forty-two percent of investors polled also said they see a period of below-trend growth and above-trend inflation.

In India, Asia’s third-largest economy, the benchmark wholesale-price index rose 8.98 percent in March from a year earlier, the commerce ministry said today. The Reserve Bank of India last month predicted inflation would be 8 percent by the end of March.

‘Rock and Roll’

The global economy is experiencing a “rock and roll recovery,” said Holger Schmieding, chief economist at Joh Berenberg Gossler & Co. in London. “While occasional shocks are rocking the markets, the recovery keeps on rolling.”

The oil shock did hit the U.S. economy hard in the opening months of 2011, as prices for regular gasoline at the pump jumped to the highest since 2008. St. Louis-based Macroeconomic Advisers reckons that gross domestic product declined 0.2 percent in February after dropping 0.4 percent in January. For the quarter as whole, the economic forecasting firm foresees GDP rising at an annual rate of 1.5 percent after increasing 3.1 percent in the fourth quarter.

The $38 billion deal to cut federal spending that lawmakers agreed on last week may trim economic growth, though at most by only a few tenths of a percentage point, said Nariman Behravesh, chief economist in Lexington, Massachusetts, for research group IHS. “Some of the numbers that have been bandied about are smoke and mirrors,” he said.

Japanese Earthquake

In Japan, GDP may shrink 3 percent in the April-June period, the most since the aftermath of the 2008 Lehman Brothers Holdings Inc. collapse, as power and supply-chain disruptions reduce production, according to the median of 18 estimates in a Bloomberg News survey in the past week. Growth should rebound next quarter as Prime Minister Naoto Kan’s proposed 4 trillion yen ($48 billion) initial reconstruction package kick-starts a recovery, the survey shows.

Tokyo-based Shiseido Co., the country’s largest cosmetics maker, said this week the quake may have reduced its sales by 3 billion yen. A Shiseido factory that makes products including shampoo was damaged by the temblor.

China’s economy also may be decelerating, although, unlike in the U.S. and Japan, that seems more by design than happenstance. GDP rose 9.7 percent in the first quarter from a year earlier, the statistics bureau said today, down from a 2010 peak of 11.9 percent.

‘Out of Control’

A slowdown in the world’s second-biggest economy would help address inflation that billionaire investor George Soros warned this week is “somewhat out of control” in the aftermath of a record credit boom and higher commodity prices. The People’s Bank of China has raised interest rates four times and boosted banks’ reserve-requirement ratios six times since early October to contain price pressures.

Doubts about the euro area’s economic outlook have also increased after the European Central Bank raised its benchmark interest rate last week for the first time since July 2008, threatening to compound the pain of the continent’s sovereign-debt turmoil. Portugal last week followed Greece and Ireland in seeking an international bailout and is being told to implement a tougher fiscal squeeze to win it. Bonds of Europe’s most-indebted nations fell yesterday on concerns that they will have to restructure their debts.

Commodity Prices

The moderation in global growth has taken the edge off some commodity prices. The most-active copper contract closed at $4.3035 a pound yesterday, down from a record $4.6575 on Feb. 15, in trading on the Comex in New York. Lumber futures fell 22 percent to $266 per 1,000 board feet yesterday on the Chicago Mercantile Exchange from $340 on Jan. 4, the highest intraday price since May 5, 2006.

The deceleration hasn’t led so far to a repeat of the “double-dip” talk that was prevalent last year when the outbreak of Europe’s debt crisis fanned fears among investors that the world economy was relapsing into recession.

There are good reasons for that, Hensley said. The U.S. labor market is strengthening, with private-sector payrolls rising by 470,000 in the past two months, the biggest such gain in five years. Unemployment fell to 8.8 percent in March from 9.8 percent in November, the sharpest drop since 1983.

Balance Sheets

Balance sheets are also in better shape. Net worth for households and nonprofit groups rose by $2.1 trillion in the fourth quarter of 2010 as share prices rose and families rebuilt finances tattered by the recession, according to Federal Reserve figures.

The improvement is encouraging some consumers to take on debt again. JPMorgan Chase said this week that its credit-card-services sales volume -- the amount of money spent using its branded cards -- climbed 11.7 percent in the first quarter from a year earlier. That’s up from 9 percent in the fourth quarter and 4.2 percent in the first quarter of last year.

The increase “does reflect some underlying positive sales trends for consumers in general,” Douglas Braunstein, chief financial officer of the New York-based bank, said in an April 13 conference call with reporters and analysts. The second biggest U.S. bank by assets reported that its profits rose 67 percent in the first quarter to a second consecutive record as provisions for bad mortgages and credit-card loans tumbled.


Corporations also have improved their finances. Profits from current production climbed 29 percent last year, the biggest annual gain since 1948, Commerce Department figures show. And in a sign that industrial production may continue to improve, railroad-shipping volume, excluding coal and grain, increased 7.9 percent in the first quarter, according to data compiled by the Association of American Railroads.

U.S. stock prices have weakened as growth has slowed, with the S&P 500 off 2.1 percent from its 2011 high set on February 18. That pales against the 16 percent mid-year fall the index suffered in 2010 as concern about a double dip took hold.

“We’ve had a little bit of a wobble the past couple of days but we’ve come a long way, in effectively a straight line, since a few months ago, so it’s not surprising,” O’Neill said.

He took encouragement from the recent rise in the Chinese stock market and said it suggests a growing confidence among investors about the country’s ability to engineer a “happy slowdown” of its economy. The Shanghai Composite Index, which tracks the larger of China’s stock exchanges, has climbed 14 percent from its 2011 low set on Jan. 25 and traded at 3,050.53 at 3:32 p.m. in Shanghai.

In Europe, much depends on Germany, the region’s largest economy, which expanded in 2010 at the fastest pace in two decades. The country’s government yesterday raised its forecast for growth this year to 2.6 percent from 2.3 percent. The economy climbed 3.6 percent in 2010.

“There are a larger number of risks out there than is typical at this stage of an expansion,” said Allen Sinai, president of Decision Economics in New York, talking about the global economy. “I don’t think they are show-stoppers.”

Download: Gosslers Schmieding Says Europe Bailout Fund Intact


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