Even in the UK, the markets are beginning to hope that the next move in base rates will be down not up, and an increasing number of Treasury officials (who were tacitly in the Government's camp three months ago) are now coming around to the Chancellor's view that a base rate increase would be a mistake.
I remain uncomfortable with the emerging consensus. At present, the world is split into two camps. The US and other Anglo-Saxon economies - as well as Japan for quite separate reasons - have seen a very sharp slowdown in growth in recent months, and GDP in that group of countries may well actually decline in the second quarter. Against this, the European economies have slowed much less, and the devaluing group of countries on the peripheries of the EU is still booming.
It is far from clear where the UK fits into this pattern. Is it an Anglo- Saxon economy, quite late in the economic upswing, and suffering from last year's monetary tightening? Or is it a peripheral EU economy, still motoring along in response to an undervalued exchange rate, and now requiring a further monetary tightening to cope with serious capacity constraints in manufacturing? Clearly, the UK has features common to both of these paradigms, which is why policy is presently so difficult.
But actually, even in the Anglo-Saxon group of countries, it seems that gloom about growth prospects could well be overdone. The UK retail sales figures published last Friday were clearly not consistent with the onset of an economic recession. Not only did retail sales rise by 0.7 per cent in June, but previous figures were revised upwards, so that the annualised growth rate in real consumers' expenditure in the second quarter now seems to have been around 2 per cent.
Admittedly, the US economy is suffering from a burst of inventory shedding, but even this now seems to be petering out, and the industrial production figures for June showed that this sector of the economy is now stabilising. The next big swing in market sentiment in the US could be back towards a belief in faster GDP growth over the remainder of 1995.
What about Europe? Any assessment of European growth at present is handicapped by the fact that recent German industrial production figures have not been worth the paper they have been printed on because of a change in statistical procedures in January. This means that there will be no German GDP data for 1995 until September at the earliest, and even when they do appear, they are likely to be very unreliable.
However, there are other information sources available, and these generally suggest that German growth has remained reasonably robust so far this year. For example, the chemical industry has reported that its output in the first half of 1995 was 6 per cent up on a year earlier, while motor vehicle production surged by about 17 per cent in the first four months, and business surveys suggest that capacity utilisation in manufacturing has been rising strongly.
This evidence from Germany is supported by strong activity data from most other countries in the EU. For the EU as a whole, industrial confidence has dropped fractionally in recent months, but its absolute level remains close to previous cyclical peaks, and there has been hardly any decline in either domestic or export order books so far this year.
This last fact may seem particularly surprising in view of all the fuss that has been made about the rise in European currencies against the dollar. But when one realises that on average the European currencies have risen by only 7 per cent against the dollar this year, and that they have fallen by 5 per cent against the yen, the resilience of European export orders to the "currency shock" becomes less surprising.
Of course, there is some difference developing between the core countries of Europe and the devaluing countries around the periphery, with the latter group tending to be more buoyant than the former. Among the core, France does seem to have weakened quite considerably, and could face a torrid time unless interest rates can be reduced quickly from their present high levels. But on average any dent to the European expansion this year has been slight, and the underlying growth rate in the EU economy almost certainly remains at or above its long-term trend.
This firmness in economic growth has not been due to consumers' expenditure, which has been growing by only around 1.5 per cent in Europe this year. Instead, it owes everything to a little-noticed, but now quite pronounced, recovery in capital spending in almost every country in the EU. In recent months, there have been fears that this source of expansion would also peter out, owing to the adverse impact of the currency shock on business confidence, but survey data published last week by the European Commission (and collected by national sources in March/April) show that this has not happened.
The table demonstrates that there has actually been a slight increase in investment intentions for this year since the previous surveys of business capital spending plans were collected in the autumn of 1994 (when industrial activity in the EU was, of course, very strong, and capacity utilisation was rising sharply). For the EU as a whole, companies now plan to increase the volume of investment by 13 per cent this year, compared with the 9 per cent last autumn.
Among the big companies, planned investment increases are particularly pronounced in the devaluing bloc, including Italy (18 per cent), Spain (15 per cent) and the UK (13 per cent). However, there are also encouraging increases planned in the core economies, including France (12 per cent) and Germany (10 per cent).
In the past, surveys taken at this time of year have generally been accurate to within 3-5 per cent of the eventual outturn, so a strong year for European capital spending now seems assured.
Sceptics have argued that Europe is no longer a good place to invest, because of restrictive labour regulations (enshrined in the EU's Social Chapter), and a 20-year trend decline in rates of return on capital. They point to increasing numbers of blue-chip Western European companies that are shifting their new plants to emerging countries in European Europe and the Far East. All this may be true, but it does not rule out a very strong upsurge in European capital spending at home in the next two or three years for plain vanilla cyclical reasons.
Because capital spending has been so low since 1992, the rate of capacity utilisation has already risen to above-normal readings in the EU, despite the fact that the recovery in GDP has been quite anaemic, and has lasted only two years.
Companies have quite simply delayed replacement spending for too long, and are now poised to catch up. The resulting surge in capital spending will keep the European economies quite strong. And, for my money, the UK economy will share in this European capital spending boom, and will also turn out to be stronger than the pessimists currently predict.Reuse content