Economic and market briefing: GDP Releases

Last week witnessed a large number of GDP releases, most of which were quite negative in their messages. Therefore:

–          Unsurprisingly, the slumps in the Euroland periphery continued apace and although both Germany and France reported some positive growth rates over the quarter, the amounts were limited, did not involve an improvement in nominal GDP growth rates, and appeared worryingly to be the result of an assumed and probably unsustainable improvement in net exports.

–          Japan on the other hand witnessed an unsurprising decline in its net exports that brought its overall level of GDP down quite sharply but its level of real domestic demand was actually up 1.6% year on year, despite the ending of the government’s green consumption subsidies. Indeed, the fall in Japanese domestic demand during Q3 was quite modest in the circumstances.

–          Elsewhere, we find that much of the Asian GDP data was also relatively soft during the third quarter

–          Even at 2.0% annualised, the US real GDP growth numbers were well below the consensus estimate of the US’s perceived trend rate of growth (although it may well have been in line with likely current and future trend of US growth).

Of course, few if any of these numbers were surprising (although Japan’s data were interesting) and most of the numbers released were close enough to consensus estimates not to lead to too much fuss in the markets.

But, it should not be forgotten that in aggregate the GDP numbers clearly suggest that the global economy is growing at a rate that is well below its trend rate and therefore that the global negative output gap may be widening and that demand pressure is falling further below trend at present.

This would seem to represent a very dis-inflationary or even deflationary scenario, and it would certainly seem that so far at least, the various Quantitative Easing (QE) regimes have failed either to close the negative output gap or create the higher rates of inflation that some expected.

This failure is likely to lead policymakers to look for new levers. There is a clear risk that the policies brought forward are not centred on structural reforms to improve the supply side, which we and markets generally would welcome, but are instead focused on increasing state intervention in markets and economies. An attempt at developing a more ‘mixed economy’ might be welcomed by those who believe that the free market has failed, but any heavy handed or mis-guided intervention would be poorly received by markets.

James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla