GDP expanded by more than expected in the US, France, Japan and the UK in Q409. For the MAEs as a whole, activity increased 0.8%, up from 0.3% in Q309. While the EA suffered a slowdown in Q409, this was largely anticipated, as the car-scrapping scheme came to an end in Germany. Only Italy suffered an adverse surprise as growth slipped back into negative territory in Q409; but there, as in France and Germany, more recent data point to a pick-up in Q110. The outperformance of GDP among the MAEs at the end of last year offers some reassurance that a turning point for the world economy was reached in mid-2009.
The driving forces behind the recovery have included the rebound in world trade, a slowdown in the pace of inventory draw-down and fiscal policy easing. World trade volumes have now recovered nearly two-thirds of the losses witnessed after October 2008. Inventories made a positive contribution to Q409 GDP growth in the US, Japan, UK, France and Italy, while government spending has supported growth in many countries and tax cuts have mitigated the impact of higher private-sector saving rates.
While these factors are unlikely to prove a lasting source of growth, there have also been some encouraging signs that conditions may be starting to emerge that will support a return of modest but self-sustaining private-sector demand growth. In particular, private sector non-residential investment has started to recover in the US, while labour markets across the MAEs have started to stabilise. The latter should help support a stabilisation of household saving ratios from 2011.
Fitch expects the expansion in activity in the MAEs to continue at a similar pace in 2011, despite the anticipated withdrawal of fiscal stimulus. Private-sector investment is expected to stage a recovery in line with historical cyclical patterns and household saving ratios should start to flatten off as job market conditions stabilise and the impact of negative wealth effects fades. Nevertheless, the process of household sector de-leveraging - evidenced by the declines in household debt/income ratios seen to date of between 5% to 10% of disposable income in the US, UK and Spain - is set to continue to weigh on growth. This will likely prevent the above-trend bounce-back in growth typically witnessed as recovery progresses.
Against the backdrop of firming activity, a commodity-price-related pick-up in headline inflation rates and a normalisation in interbank funding markets, the major central banks have been starting to phase out extraordinary liquidity measures. But while Fitch is now also pencilling in a 25bp rise in the Fed funds rate in Q410, monetary policy in the MAEs is unlikely to be tightened sharply within the next 18 months, as growth rates remain relatively subdued, unemployment and spare capacity high and fiscal tightening is in prospect. The monetary policy outlook for Brazil, China and India is somewhat different, as the potential inflation consequences of earlier stimulus policies - in the context of surprisingly robust growth - are of greater concern.
