Although the Euro-Zone remains the most high profile global risk centre for markets, the economic data has not been as dire as many would have guessed.  While the Euro-Zone did show negative growth in the 4th quarter of 2011, Germany’s strong export performance helped the economy of the 17 countries that use the Euro narrowly avoid a recession in the first quarter of the year, as official figures showed recently.  Eurostat, the EU’s statistics office, found that the euro zone economy growth was flat (unchanged) in the 1st quarter of 2012, though the figures provided clear evidence of the contrasting fortunes within the single currency bloc.  Germany, Europe’s biggest economy, was primarily behind the better-than-expected performance as a strong export performance helped it grow by 0.5 per cent.  The overall flat performance hides huge disparities in the euro zone, with the debt-ridden countries such as Greece, Spain and Italy mired in recession.  Though an official recession has been avoided for now, the April and May data has slipped back again somewhat.  The bottom line is that while we don’t see a full-blown recession for the Euro-Zone, the weaker economies are clearly in recession and growth from the entire region will remain subdued for some time longer.  But, at less than 20% of the global economy, slower Euro-growth will not be enough to derail overall global economic growth, particularly since the Euro-zone had been underperforming the global economy for most of the past two decades!  Instead of focusing solely on the ‘weak sisters’ in Europe, look at the four biggest economies in the world and their growth rates in the first quarter;  U.S. +2.2%, China +8.1%, Japan +4.1% and Germany +0.5%.

The U.S. economy has clearly been the strongest over the past few quarters though, buoyed by the recovery in the housing sector as well as strong auto sales.  Low interest rates have fueled some spending by consumers and corporations alike (although Corporate America is already sitting on the largest amount of cash in history…..over US$1 billion in the S&P500 companies, even excluding the financial sector).  One of the most important sources of resurgent growth in the U.S. has been the beginning of the long-awaited recovery in the housing sector.  Housing starts in the U.S. had been running at close to an annual rate of 2.0 million units at the peak of the housing boom in 2005-06.  Since the financial crisis in 2008, this dropped all the way down to the 0.5 million annual rate.  However, in the past year we have seen this climb back into the 0.7 million annual level and we expect this to continue to increase as the housing inventory gets wound down.  A reasonable target for housing starts would be around 1.0-1.2 million units per year, which is the number of new households formed in the U.S. each year.  Improving housing has supported various commodity markets (lumber, wallboard, copper) and well as the fortunes of the retailers such as Home Depot, Lowes and Walmart.  We have also started to see some increases in home prices as well, as shown in the chart below.  In the past three months we have seen the first year-over-year gain in home prices since the beginning of 2007!

US Home Prices Recovering

The recovery in housing is logically leading in an improvement in consumer confidence in the U.S. as well (as shown in the chart below) and we expect a similar gain to spread to other economies as U.S. growth adds strength to the global economic picture.

Consumers' Confident Outlook

So where do we stand now?  Clearly our view continues to be that the global economy is on a recovery path from the 2008 downturn, though diminished in the past year by the slowdown in the Euro-Zone due to the sovereign debt crisis there and a temporary reduction in Chinese growth in order to subdue inflationary pressures there.

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