US and Europe look better, liquidity surge continues
With the global industry PMI at a 32-month high and employment creation at a 30-month high, the US economy delivering a solid 2.8% Q3 growth along with 204,000 new jobs in October, and the eurozone PMI showing an expanding tendency for four months now—recovery’s poster-boy Ireland’s PMI is at an 80-month high—the global economy hasn’t looked better in a long time. And, as global markets testify, with the Fed looking like it will postpone its taper probably till the second quarter of 2014 and the ECB cutting its refinance rates by 25 bps, liquidity is more than abundant—Japan’s pace of monetary expansion is around 60% that of the US Fed, so even if the US was to begin a taper, global liquidity has a long way before it eases. At 2.8%, US GDP has gained strength, from 0.1% in Q4 2012 to 1.1% in Q1 2013 and 2.5% in Q2 2013. And this is despite government consumption, due to the sequester kicking in, contracting between Q4 2012 and Q2 2013—it rose marginally, by 0.2% in Q3 2013. And at 1.45%, the contribution of private investment to Q3 GDP growth hasn’t been higher in the past 6 quarters.
But the reason why it is probably prudent to remain cautious lies in the sectoral break-up of GDP growth. Private inventories contributed 0.83 percentage points to the quarter’s 2.8% growth, suggesting perhaps that were demand to slow down, inventories will wind down and cause a collapse in GDP growth in the next quarter. This is precisely what happened in both Q2 2012 and Q4 2012 when, with inventories contracting sharply, so did GDP growth after rising strongly in the previous quarters. The other view is that, given how GDP is rising in a steady manner for several quarters now, rising inventories are really just businesses stocking up for the future; rising inventories, according to this view, are a problem only when the economy is trending down. What makes it advisable to exercise some caution, though, is the slowing down of private consumption expenditure in the US—the last time it grew by just 1.5% was 9 quarters ago. Equally worrying, US manufacturing PMI in October grew at its lowest in the last 12 months – the US GDP data just out is for the quarter ending September, so the PMI suggests a likely softening. The biggest reason for caution, and this is why the Fed put off the taper, is the considerable uncertainty over how the US lawmakers will resolve their impasse and, if they don’t, the impact this will have on growth. All of which means, for India, probably a few more months of easy liquidity—as of now, however, the global economy looks on track for stronger growth.