FYI | Jun 01 2006
By Greg Peel
Danske Bank reports global business confidence has surged since mid-2005, after having peaked and then abated over 2004. It is now at record levels. Danske expects a return to average in the third quarter.
Danske notes business confidence as measured over a longer period is a good proxy for GDP growth, although there is a clear tendency for confidence to overshoot. This is likely what has happened as we experience record highs, and given a wide expectation of a softening of global GDP into 2007, the next move for confidence is a swift retracement.
The overshoot factor is something Danske puts down to inventories, which it believes tend to exaggerate the impact of underlying GDP growth. If consumer demand rises, inventories are soon pillaged, and companies get all excited and pump out a lot more inventory than may be warranted.
Inventories are currently at high levels, so production is vulnerable if current demand growth should begin to falter.
The demand side is under pressure from high oil prices, leading to higher inflation and erosion of disposable incomes worldwide, notes Danske. Rising bond yields will also hit demand as housing prices cool globally. The slowdown in consumption will ultimately feed into manufacturing over the coming months.
While GDP growth is set to lose some steam we are not, says Danske, heading for global recession. Business confidence is unlikely to fall to recessionary levels. When the industrial cycle turns in the second half we will, however, see lower bond yields, leading to a reduction of monetary policy tightening, and lower earnings growth on equities.