There are green shoots everywhere, or at least this morning brings more cause for optimism than in a while with good news from the US, Germany and Italy.
Across the pond, consumer confidence is now at its highest level since 2002. The consumer sentiment index as measured by the Conference board is now at an impressive 107.2, from 102.7 last month, and is now at its highest level since May 2002.
And while US consumer confidence soars, the Federal Bank has upped rates again; it’s the fifteenth time on the trot, and the US short term rate of interest has risen from just 1% in May 2004 to today’s 4.75%.
US rates are now higher than in the UK, and the feeling is that the Fed has got at least one more hike left to make. With many still predicting the Bank of England will lower rates again at some point this year, the differential between US and UK rates of interest is likely to grow, perhaps putting pressure on Sterling.
Fed new boy, chairman Ben Bernanke, is known to be something of a plain speaker, and has said that future fed plans over the rate will be kept in the open. And yesterday, the Fed issued a statement saying: “Some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance.”
And while the US rate of interest moves north of the UK level, signs are emerging that the ECB may follow suit.
There was in fact good news and bad from Italy yesterday. The bad news, growth in GDP in the last quarter of 2005 was zero. Another quarter like that and the economy will be in technical recession. But the runes are saying otherwise. Italian business confidence is a good indication of growth in the months ahead, and it is now at its highest level for five years.
But while the US sees consumer confidence hit a 4-year high, and business confidence in Italy soars to a five-year high, these achievements seem like nothing compared to the rise in confidence indices in Germany.
The German business climate index has hit a 15 year high, jumping from 103.4 last month to 105.4 in March. And yet the consensus forecast was for a fall in the index.
Put all that news from Italy and Germany together and what do you have? According to Capital Economics several more jumps in the Euro zone rate of interest, reaching 3.75% from the current level of 2.75% by the year-end.
The fall in the rate of interest differential between the UK and Euro zone could also put Sterling under pressure. Before the Bank of England lowered rates last summer, the UK short-term rate of interest was 2.75% higher than the euro zone level. If predictions prove accurate, and both euro zone rates rise and the UK level falls with predictions, this differential could be as little as 0.5% by the year end.
With the consumer all but satiated with retail therapy, and with Gordon Brown finally putting the reins on government spending, the UK is reliant on business investment, improvements in productivity, and increases in exports to get GDP growth up to government’s targets.
You can be forgiven for being cynical about productivity or investment improving, but at least the latest confidence indexes suggest a slightly easier time for our exporters to some of our main trading partners.
Sources
Fed raises rates again
CNNMoney
Consumer Confidence Index highest since 2002
CNNMoney
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