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Mood swings: the economic world this week

Mood swings: the economic world this week

Goldman Sachs chairman Jim O'Neill sees a perkier global economic outlook at the start of 2012. Will it last throughout the year?

January 23, 2012 5:16 by

I spent most of this past week in New York, and to my slight surprise, there appears to be some shift in the mood about the state of life. Whether this is because it is the start of the year, asset prices have been perkier, or there is some recognition that the US economy and other parts of the world are not as bleak as the second half of 2010 is not so clear. It was certainly quite nice to hear and, in my judgment, is more reflective of what is going on.

Since last August, I’ve openly expressed that the US recovery would be stronger than people realised. Most of the additional data being published gives fresh support to this view. A renewed drop in weekly job claims and some further better-than-expected housing data occurred this week. These releases coincided with more signs from the business world and beyond that the economy may be improving.

Four different areas pricked up my ears. The first is repeated evidence of a pick-up in commercial bank lending from their Q4 results and, with it, the reported money supply from the Fed. The second is a changing mood about the housing market, in addition to a better tone of some of the data. Third, there is a lot of growing marginal evidence about US manufacturing becoming more competitive, including another interesting story in the US edition of the FT on Wednesday. And fourth, there is considerable talk about the rapidly-improving domestic energy supply situation in the US which, in itself, is helping boost the domestic industrial plans of some of corporate America. All four of these items were things I suspected were happening, but it was quite refreshing to hear so much talk about them.

About the only thing left to sort out is the staggering amount of wasted time one encounters going through passport control at JFK these days…

I continue to believe that the consensus on the 2012 US outlook needs to get a bit cheerier since most professional forecasters have not yet captured this mood. There is a view that much of the improvement has been seasonal. While possible, I have increasing anecdotal evidence and belief to suggest it is more. We are still forecasting 2.5 percent real GDP for 2012 at GSAM, which is above consensus.

The mood I encountered about the world outside the US wasn’t quite as dreadful as I had heard on previous visits, with a couple of people telling me that the ECB’s 3-year LTRO was a “game changer”. More on that in a minute.

I also didn’t hear quite as much passion about the Chinese hard landing view either. This might be because on Tuesday, the Chinese stock market enjoyed its largest one-day rally in a long time, coinciding with a set of much better-than-expected economic reports and talk of forthcoming monetary easing.

This week’s Economist has a very interesting piece about the latest Chinese data, suggesting that the share of consumption in GDP might have started to pick up. As I have maintained as the number one global topic for this year, if China can combine “slower” growth with a rising consumer, a softer external surplus and lower inflation, this is as close to nirvana as you might get.

As the Economist piece suggests, there are some strong hints of this already in the Q4 GDP report. While China’s GDP at 8.9 percent was its weakest quarter for over 2 years, it was better than expected. And, while we have sketchy details, the trade surplus ended the year barely above 2 percent of GDP and the latest retail sales were above 18 percent.

One other point for all the China bubble watchers out there. Official Chinese estimates now show that just over 50 percent of the population is urbanised. Based on most people’s estimates, including work I have been involved in, it is likely to move to…

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