Bloomberg News

World Growth Bouncing as Employers Take Baton From Central Banks

June 26, 2014

Ford Motor Co.

Stepped-up spending plans are helping reverse the surprise slowdown of the global economy at the start of the year. Photographer: Angel Navarette/Bloomberg

Companies from Ford Motor Co. to Panasonic (6752) Corp. are providing fresh fuel for the global economy as they begin to bolster employment and investment.

Stepped-up spending plans are helping reverse the surprise slowdown at the start of the year. They also signal that the next stage of international expansion will be stronger than the tepid recovery so far from 2009’s worldwide recession.

“A pickup is taking place after a significant deceleration,” said Gustavo Reis, New York-based economist at Bank of America Corp., which expects global growth to improve to 3.1 percent this year and 3.7 percent next year from 2.9 percent in 2013.

Companies are investing in plant and labor after having run up piles of cash and devoted much of what they did spend to buying back stocks or issuing dividends. In a sign animal spirits are returning, takeovers so far this year have totaled about $1.5 trillion, the most since 2007, led by Comcast Corp.’s (CMCSA:US) $68 billion acquisition of rival Time Warner Cable Inc.

Pent-up demand, cheap funding costs and an easing of uncertainty are reasons economists at Citigroup Inc. now predict business investment will grow 3.3 percent in advanced economies this year and 4.2 percent in 2015, rebounding from a 1.2 percent pace in 2013.

Ford Hiring

Ford is likely to hire more than 12,000 workers, and “there’s a high probability we’ll overshoot” that target, Joe Hinrichs, Ford’s president of the Americas, said in an April 30 interview. Meanwhile, German rival Volkswagen AG intends to invest almost 38 billion euros ($52 billion) in property, plant and equipment in its home country over the next five years.

Japanese technology companies Panasonic and Toshiba Corp. (6502) are planning to spend a combined 625 billion yen ($6.1 billion) this fiscal year, according to a report in Nikkei newspaper this month.

Highlighting what they called the “missing link in the U.S. recovery,” Deutsche Bank AG economists told clients in a report last week that spending on business equipment in the U.S. will grow as much as 6 percent next year, picking up from a 2 percent to 3 percent rate over the past year.

“Capex spending is likely to accelerate in the near term, helping to drive a solid upturn in growth, though not a booming one,” said Torsten Slok, Deutsche Bank’s chief international economist in New York. “The pickup in capex we envision would confirm that the recovery has reached a self-sustaining stage.”

A report yesterday pointed to gains in investment in the U.S., where manufacturers received more orders for business equipment during May. Bookings (CGNOXAI%) for capital goods such as computers, a proxy for business spending, rose 0.7 percent after falling 1.1 percent in April, according to data from the Commerce Department in Washington.

Businesses also are hiring again, providing a fillip for job seekers as well as for workers who may be in a better position to seek higher wages.

Global Unemployment

JPMorgan Chase & Co. economists reckon global unemployment fell to 7.1 percent in April, the lowest level since December 2008. The U.S. rate of 6.3 percent is already the lowest since September 2008, the month Lehman Brothers Holdings Inc. went bust.

Elsewhere, a 3.6 percent unemployment rate in Japan matches a 2007 low, and German joblessness is the smallest in more than two decades at 6.7 percent. Hiring has even climbed in Spain and Greece to help tug the euro-area rate down from its record of 12 percent. In the U.K., job growth has quickened so much that investors are bringing forward bets for interest-rate increases.

Confidence Booster

“We are getting traction,” said Julian Callow, founder of Catalyst Economics Ltd. in London. “The improvement in labor market is important because it supports income and confidence which in turn support consumption and growth.”

Such acceleration would be welcome news for central bankers long eager to pass the baton for driving growth to the private sector, while also leaving them wary of the implications for inflation amid signs its three-year slide is now over.

“Recovering growth doesn’t come without its problems, not least for policy makers having to decide when to raise interest rates while ensuring that higher rates don’t threaten recovery,” said Mark McFarland, Hong Kong-based chief economist at Coutts & Co.

The greater optimism about the outlook is shared by investors, with a net 66 percent telling Bank of America this month that they expect a strengthening economy, and a record 63 percent urging businesses to boost their capital spending in response. Equities (SPX) were favored as an asset class by more than any time this year in a sign of renewed bullishness.

Slump Ending

Faster activity would mark a shift from the beginning of the year when a deep freeze in the U.S. and a property-driven slump in China conspired with a deflation shock in Europe and a consumption-tax increase in Japan to upend demand.

Risks still abound as oil prices climb amid tensions in Iraq and Ukraine, while wage growth remains soft in most places. A report this week showed German business confidence fell to the weakest this year in a sign Europe may still struggle to escape weak inflation.

A survey of investors by Barclays Plc released this week identified geopolitics as the biggest threat to financial markets over the next year, trailed by a slowdown in China and other emerging markets and a tightening of monetary policy in the U.S.

The price of Brent crude jumped as much as 10 percent since early April to more than $115, the highest since September. That level previously foreshadowed a weakening of global activity and could do so again by squeezing the disposable income of consumers and denting the profits of companies, according to Karen Ward, a global economist at HSBC Holdings Plc in London.

“This is bad news for the global economy,” said Ward.

Stimulus Bias

The desire to ensure growth takes hold probably will still leave central banks biased towards providing stimulus as they look for wage gains to confirm the expansion can endure.

Federal Reserve Chair Janet Yellen last week pledged to maintain monetary aid for as long as necessary even as officials pare asset purchases, while Bank of England Governor Mark Carney this week tempered recent comments on the timing of rate increases. European Central Bank President Mario Draghi is signaling rates in the euro area will probably remain low for at least another 2 ½ years.

Inflation Muted

“Our big-picture view of the world is one in which growth stays strong but inflation remains muted, like it was in the 1990s,” said Trevor Greetham, director of asset allocation at Fidelity Solutions in London. “This backdrop is good for developed-market equities as it allows central banks to keep policy loose even when growth is improving.”

Still, the JPMorgan economists estimate global inflation reversed three years of slowing in May by accelerating 2.65 percent, the most since April 2012, as companies regain pricing power.

“We definitely have seen the turn,” said David Hensley, an international economist at JPMorgan in New York. “It would be an abrupt swing to go to worrying about the inflationary upside, but we may be seeing that shift taking place.”

To contact the reporter on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net

To contact the editors responsible for this story: John Fraher at jfraher@bloomberg.net Mark Rohner, Chris Wellisz


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