Our quarterly Global Scenarios hit the streets today with a relatively upbeat message. We have long argued that the ISM index would bottom out around the 50 level in Q1 and recover during the rest of 2007. It now seems that this movement has come more quickly and more strongly than we anticipated. The outlook for global industrial activity therefore looks bright for the rest of the year. The US downturn had little impact on the rest of the world - in fact it was the rest of the world that rubbed off on the US.
But the fundamental reason why the US looks like making a comeback in H2 is not so much the rest of the world growing strongly as the recession in the US housing market being on its last legs. The latest data show that construction is already stabilising and looks set to stop dragging down GDP growth as early as Q3. Since homebuilding has been the main reason for the US growing below trend in recent quarters, this means that the economy is probably headed back to abovetrend growth even now in mid-2007.
This is good news for global growth - but bad news for the central banks because, as we have stressed here many times before, there is little capacity left in the global economy.
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