Global economy

The wall of worry over the state of the global economy is still very much with us. But the pessimism is overdone. The IMF estimates that the global economy will grow at an average of 4.5% per annum between 2010 and 2012, very much in line with its trend. There was a slight slowdown in activity around September/October last year but the monthly surveys (PMIs, OECD lead indicator) show a vigorous pick-up since then. Interestingly, this is concentrated more on manufacturing than services. What seems to be happening is the necessary rebalancing of the global economy as the over-indebted, over-consumed economies divert resources away from consumption and property to manufacturing and trade. This will take time and will not be immediately obvious in the statistics. But it has to happen or else the world will disolve into protectionism. The only real problem lies with those economies whose exchange rates are tied to that of Germany, the economy that is showing everyone else how it should be done. These economies will struggle and will be unable to pay their debts.

UK economy

The 4th quarter GDP figures were revised downwards, from a first estimate of -0.5% to one of -0.6%. Falls in service output were greater than first estimated and growth in industrial production was less. The UK economy is still perceived as being very weak.

The CIPS PMI figures suggest that the gloom is somewhat overdone. The CIPS manufacturing index is now 61.5, which is the highest it has been for a long time. Interesting the CIPS surveys confirm the weakness in the service sector. For once, it is industrial production that is driving the UK economy and as a result growth in the 1st quarter of 2011 should be significantly better than that of the 4th quarter 2010.

The German economy

The German economy grew by remarkable 4.0% in the year to December, levels seen only briefly at the end of 2006 and mid-2000. Contrary to the impression of an externally driven economy, the majority of this growth has come from domestic demand. The biggest driver was investment contributing 1.4%, but private consumption grew by 0.8% and public consumption by 0.6%. Net trade contributed 0.6% as did inventory build. Consumer confidence has improved noticeably throughout 2010 and is at its highest level since early 2007.

The other impressive feature of the economy is unemployment now down to 7.4% well below that of the USA. The number of jobs is growing at 1.5%, although the number of Germans wanting to work is growing at a more sluggish 0.3% (vacancy levels have increased dramatically over the last year).

The outlook for 2011 remains positive and there is no reason why Germany cannot grow at 3% over the year. The risks are twofold; the first is a collapse in demand for German exports from emerging economies and the second is a banking crisis brought on by a PIIGS default. Neither is very likely this year.