Bank Research Consensus Weekly 05.31.10
Sovereign Headwinds Stretch the Monetary Peloton
Manoj Pradhan, Global Economics Team, Morgan Stanley
Risks are easy to find these days - sovereign risks, rising concerns about the banking sector, funding markets...take your pick. While elevated sovereign risks should not have come as a surprise (see Global Forecast Snapshots, December 9, 2009), the other two problems have brought with them a sense of déjà vu of the 2008 financial crisis. At a time when disagreements about the future course of the economy and markets are again widespread, however, one thing is universally accepted: the longer the sovereign credit concerns remain in place in the euro area, the greater is the chance that they will spill over into contagion or growth concerns elsewhere. And this time round, policymakers are constrained in their options, unlike their position at the onset of the financial crisis and the Great Recession. Markets are pushing nearly all G10 fiscal policymakers to consolidate their balance sheets and rein in deficits and debt. That is a tall order by itself, given the tenuous nature of the recovery in most developed markets. Monetary policymakers, by elimination, are left to deal with the repercussions within and spillovers from the events in the euro area.
United States - Economy Quietly Chugging Along
Dina Cover, Economist, TD Bank Financial Group
As markets remain focused on the situation in Europe, the U.S. economy continues to quietly chug along. The BEA’s second estimate of first quarter real GDP growth was released this week, and despite falling below expectations, the economy still advanced at a decent 3% Q/Q annualized clip. And looking ahead to the current quarter, it appears as though the recovery continues to gain traction.
Consumers are beginning to feel the benefits of the recovery, as evidenced by the surge in consumer confidence in April to the highest level seen since March 2008. While it is unclear as to whether the current financial market turbulence is reflected in these results – and should it persist, confidence may reverse course next month – the fact that both present circumstances and future expectations increased in April is a good sign for the economy. Indeed, rising consumer confidence and, in particular, an improvement in employment prospects, tends to lead to increased household demand, suggesting that consumer spending will be a supportive factor to economic growth in the coming months.
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