The Japanese earthquake is a complicating factor here, since the disruption to production in Japan has had a knock-on effect globally, something which showed up in the recent manufacturing surveys in the US and elsewhere.
Also, there have been a couple of other complicating factors in the shape of a very late Easter holiday and the Royal Wedding in the UK. All these may be clouding the underlying picture, so either this is just a temporary hiatus, which will go away once production in Japan is back to more normal levels, or there has been a genuine slowdown in the global economy.
As with most things in life, it’s probably a bit of both, but is this something we should get very worried about?
Economies don’t move in straight lines. If they did, then they would be much easier to forecast, so some volatility in the pattern of economic recovery is to be expected. Our central assumption for the US and the UK is that economic recovery is proceeding, but that it will be weak relative to previous recoveries.
The recent run of data does not give us grounds for revising that assumption. Last year we had some very strong quarters of growth in the UK and US and some much weaker ones. This year should be much the same. Assuming we’re right and we are not headed into a much weaker growth situation that the Bank of England are already expecting, the May inflation report implies that UK interest rates will rise later this year.
Markets are not pricing in a rise this year, but not so very long ago there was a strong consensus in favour of a May rise, so sentiment has been all over the place, confused by the fact that economies do not move in straight lines.
