Global recovery, inflation picking up speed

Friday, 11 February 2011 00:38 - - {{hitsCtrl.values.hits}}

Rich world economies could grow faster this year than previously thought, albeit with higher inflation and a growing likelihood that major central banks will start to hike interest rates, Reuters polls showed.

The United States is still seen leading in terms of growth but economists have revised up their more lacklustre forecasts for the euro zone and Japan. Only forecasts for the British economy became gloomier.

“While events in North Africa have captured market attention the global economic backdrop is improving. Growth indicators continue to surprise to the upside,” said Ethan Harris at BofAML.

Markets have been watching closely for further fallout from political unrest in Egypt and Tunisia, which could potentially push oil prices still higher after they hit a 28-month peak last week.

The improving growth outlook, coupled with prices being driven up by rising food, energy and commodity costs, have led central banks to start unwinding their loose monetary policies or at least begin taking a more hawkish stance.

“Key interest rate hikes are fast approaching. Output gaps are on their way towards closing. Financial conditions continue to normalise, including the beginnings of growth in the money supply,” SEB economists said in a research note. “This indicates that central banks in the major OECD countries must soon start normalising their monetary policies to keep inflation expectations under control.”

China raised interest rates on Tuesday, its second increase in just over six weeks, intensifying its own campaign against stubbornly high inflation in the world’s second largest economy.

The United States Federal Reserve, the European Central Bank and the Bank of England are all seen making their first moves at the end of this year as they battle to stem rising prices.

Only the Bank of Japan, still fighting deflation, is seen holding rates until at least next October.

Growth forecasts for the 17-nation euro zone for 2011 were revised up to 1.6 percent from 1.5 percent but British forecasts were nudged down to 1.7 percent as economists expected fiscal austerity to have a greater impact than previously thought.

In contrast US economic growth was seen averaging 3.2 percent this year, up from the 3.0 percent predicted last month, led by reviving consumer demand and an improving job market.

“Recent upward trends in income growth and retail sales, and a relative improvement in labour market conditions and consumer optimism, will push personal spending up,” said Nathaniel Karp at BBVA.

But even US growth pales into comparison when compared to predicted Chinese growth of 9.3 percent and Indian expansion forecast at 8.7 percent in the year to end-March 2012. Both should benefit export-driven economies.

“Strong domestic demand growth in emerging Asia should spill over into strong commodity demand and boost export-oriented economies with high emerging market exposure,” said Willem Buiter at Citi.

The voracious demand means Japan’s export-led economy will emerge from a lull early this year, growing 1.5 percent in the coming financial year, according to the poll. - Reuters