Despite debt drama, US still outshines Europe
If Wall Street’s record high is a signpost, the US economy has every chance of pulling further ahead of a stuttering Europe despite new battles to come in Washington over the government’s budget and debt ceiling. The last-gasp pact to avert an unprecedented US default has raised hopes that politicians will learn from the public’s hostile reaction to the standoff. The S&P 500 closed on Friday at an all-time peak of 1,744.50.
There’s probably more confidence now that next time around there won’t be this kind of brinkmanship, that there won’t be another shutdown and that there certainly won’t be a default. Expectations would be for a return of consumer confidence and of business willingness to invest and employ.
The ‘next time around’ is not far away. Congress has approved funding for the government until January 15 and has authorised it to keep issuing debt until February 7. As a result, chances for meaningful progress in the upcoming budget negotiations have improved. Another government shutdown and debt ceiling showdown next year seem less likely.
Fed on hold for now
Sentiment indicators were likely to rebound now that a deal is in place, helped in part by expectations in financial markets that the impact of the budget standoff will cause the Federal Reserve to delay winding down its bond buying, now running at $85bn a month.
Economists suspect the Fed will not act until December or January at the earliest because economic data for October will be clouded by the government shutdown. Declining weekly jobless insurance claims suggested the labour market was in good shape. Overall Economists are cautiously optimistic that things are getting better and that the fundamentals of the US economy are gradually improving.
The same cannot be said with much confidence about the Eurozone. The bloc’s purchasing managers’ index is likely to edge up to 52.5 in October from 52.2 in September, but bank lending to the private sector is expected to shrink further. The Centre for Economic Policy Research in London said that it was too soon to conclude that the 17-nation single currency area had emerged from the recession that began in the third quarter of 2011.
A two-day European Union summit will tackle some of these questions, including how to provide backstop funds to close any failing Eurozone banks – a critical component of the ‘banking union’ slowly being forged to underpin the currency. No breakthrough is expected not least because Germany has yet to form a coalition government after September’s elections. Companies are still sitting on a lot of cash and are reluctant to invest because of the uncertainties that exist in Europe and around the world.
Britain is expected to confirm continued robust growth for the third quarter, propelled by a housing recovery in southeast England that is generating something of a feel-good factor.
Japan is likely to report that exports grew at their fastest pace in three years but that progress towards its goal of 2% inflation is slow despite massive monetary stimulus.
China’s economy is likely to lose some momentum after inventory accumulation helped to lift the pace of GDP growth to 7.8% pace last quarter. China should continue to be a source of stability in a world of still very volatile and uneven growth.
Adapted from News24 – 21 October 2013