Published January 20, 2013
LONDON – The prospect of stronger European manufacturing surveys and decisive monetary easing in Japan this week ought to bolster confidence that the global economy can look forward to better days.
It is definitely not yet time to break open the champagne.
The index derived from polls of purchasing managers across the euro zone, though recovering, is likely to remain well below the 50 threshold that signals expansion.
If the Bank of Japan bows to political pressure and relaxes policy more boldly, it is because the country's noxious cocktail of a huge debt burden, deflation and dwindling external surpluses threatens an eventual fiscal crunch.
And an expected contraction in Britain's economy when fourth-quarter figures are released on Friday will be a reminder, as was Germany's grim end to 2013, that Europe has to dig itself out of a deep hole.
"The real hard economic data are still very negative," said Bert Colijn, an economist in Brussels with the Conference Board, a business research group. "There are improvements, but it still doesn't look that bright."
However, he said the economic news from the euro zone rim was not quite as troubling, and the mood was brightening among the core countries of the single currency area.
Lena Komileva, managing director of G+ Economics, a London consultancy, said it was hard to argue against investors' new-found appetite for riskier assets given that the volatility of equity prices was approaching historical lows and yields on corporate bonds had fallen sharply.
"Financial stress indicators signal a significant improvement in the health of the global economy," she said.
Friday's solid fourth-quarter economic data from China reinforced that view.
Economists polled by Reuters expect an uptick in Thursday's advance purchasing managers' indexes for France and Germany as well as for the euro zone as a whole.
Germany's IFO business confidence survey on Friday is also projected to have risen for the third month in a row.
"The fact that business confidence measures are coming in more positive is a good sign," Colijn commented.
Commerzbank said its leading indicator for the German economy reached an all-time high in December after the European Central Bank's pledge to buy the bonds of troubled economies eased fears of a break-up of the euro.
"We assume that increasingly more companies are gaining confidence and viewing business prospects more positively," said Commerzbank economist Ralph Solveen.
BNP Paribas is also bullish on Germany and is looking for a marked pick-up in growth.
In addition to the ECB's safety net, the global manufacturing cycle is pointing up, while a strong labor market and easy financial conditions are supporting consumption, economists Evelyn Herrmann and Ken Wattret said in a report.
"Moreover, should the global economy surpass expectations and euro zone market stress ease further, upside surprises would be likely to follow. A key issue in this respect would be higher export growth and confidence triggering a stronger rebound in investment," they said.
That is exactly what Japan would like to see, too.
To that end, the government of new Prime Minister Shinzo Abe and the Bank of Japan have agreed to set 2 percent inflation as a new target, supplanting a softer 1 percent ���goal', according to sources familiar with the central bank's thinking.
They said the BOJ, which meets on Monday and Tuesday, will also consider making an open-ended commitment to buy assets until the target is in sight.
FOR AND AGAINST EASING
Credit Suisse's global equity strategists said an easier monetary policy is justified to cushion the significant fiscal tightening on which Japan will have to embark before long to whittle down a government debt that has reached some 220 percent of national income.
This task is all the more pressing because Japan is moving towards a current account deficit, which will make it more reliant on foreign investors to finance its budget shortfall, Credit Suisse argued.
Trade figures on Thursday will underline the deterioration in Japan's external accounts, with economists polled by Reuters forecasting the sixth consecutive monthly deficit.
Nomura reckons the deficit for all of 2012 widened to 6.6 trillion yen ($73.4 billion) from 2.7 trillion in 2011.
Japanese equities have surged in anticipation of a more aggressive monetary policy stance, but not everyone is happy.
The accompanying slump in the yen has prompted Russia's deputy central bank governor to warn of a new round of ���currency wars' and the medium-term risk of running ultra-loose monetary policies is likely to be a theme of the World Economic Forum in Davos, which opens on Wednesday.
"I'm pretty worried about the new policies of Japan's newly elected government," German Finance Minister Wolfgang Schaeuble said last week. "When you think of the surplus of liquidity on global financial markets, it is fuelled further by a wrong understanding of central bank policy.
(Editing by Susan Fenton)