Summer is over and it’s time to take stock. Some of the summer news has been quite alarming. Instead of waning, events in Syria have intensified. The same can be said for Egypt, where the negative turn of events has reminded us of the political instability within countries undergoing significant transition. Unsettled political conditions are contributing to current market volatility and by extension, the uncertainty that has clouded the world economy for a half-decade. Hardly a hopeful context for vacation-inspired ideas.
To add to the angst, there’s new uncertainty in emerging markets. Slowdown was a concern before the summer started, but those who sold in May might have missed the key movements at work in certain exposed markets since then. In not a few cases, equities have sunk, and exit from bond markets has sent borrowing costs higher and weighed heavily on local currencies. If diversification of business activities was one of those summer ideas, you could be forgiven for being a bit doubtful.
Europe, the perennial post-crisis worry, has a new wrinkle. We’re now just two weeks away from the German federal election, and even if Ms. Merkel is a shoo-in, there is still considerable uncertainty about what the new government’s view of Europe’s woes might be. A new deal with the periphery? Deeper austerity? Increased likelihood of a significant adverse development? Sounds like additional encouragement to shelve new plans and sit on the sidelines.
These are real concerns. But here’s a pleasant mystery: along with the really bleak stuff, there is also a decent amount of good news. First, there’s strong evidence of a mid-summer pickup in business activity. Purchasing managers’ indices are up globally, with significant increases in the U.S., the UK, continental Europe and Japan, both for manufacturing and service sector activity. New orders and production activity appear to be driving these increases, which are a very welcome development.
At the same time, there has been a significant improvement in business and consumer confidencestrange, given the backdrop of bleak news and volatility. U.S. consumer confidence has broken away decidedly from its four-and-a-half-year recessionary funk. European business sentiment is up as a result of improving production expectations, and consumers are sharply more upbeat, recently erasing half of the collapse experienced in 2011-12. A rise in confidence is a strong signal that underlying economic activity, already surprisingly strong, is set to improve in short order.
A further, but perhaps less heralded indication of the global economy’s current direction is recent policy-speak. Note that in spite of laments about today’s sluggish growth and fears of a low-growth “new normal,” talk is increasingly turning to the unwinding of the extraordinary fiscal and monetary measures that have propped up the economy over the past five years. In fact, a good deal of the current volatility is related to mid-May Fed statements about tapering its bond purchases, setting the stage for unwinding monetary easing. On the fiscal side, we are on the verge of seeing a growth dividend, not because of new spending, but simply because the deepest austerity is now behind us.
The bottom line? Key signals suggest that there is something of an economic renaissance underway. If the return from extraordinary to ordinary on the policy front means that there’s a chance of a more ordinary economic recovery, this autumn could be a fun one. Keep those summer dreams alive.
Peter G. Hall is vice-president and chief economist at Export Development Canada.