More on growth in Euroland, the U.S. and the U.K.

This is going to be a short post today. I want to pick up where I left off yesterday and highlight the growth dichotomy between Euroland on the one hand and the U.S. and the U.K. on the other. Yesterday I wrote that the risk is to the upside in the U.S. (and the U.K.) if anything. By that I mean that the data are generally positive and asset prices are rising briskly underpinning private sector balance sheets. The simultaneous uptick in the real economy and in asset prices will mix with accommodative monetary policy to fuel a longer upswing in the economy, the risk being asset bubbles.

Later today, I will be putting out the links with a slew of data from around the world and what it shows is a global economy in recovery mode, with the U.K. and the U.S. leading the way in developed economies. Just today, the EU was forced to revise its economic forecast for 2013 upwards for Britain whereas the numbers remain weak for France and Germany. The Wall Street Journal writes:

In its autumn forecast, the European Union’s executive arm said the economy of the U.K.—the largest non-euro-zone country in the EU—would grow 1.3% in 2013, considerably higher than the 0.6% growth it projected in May.

The commission also raised its growth forecast for 2014 to 2.2% from its previous estimate of 1.7%, and expects growth will continue to pick up, reaching 2.4% in 2015.

In comparison, the commission expects Germany to grow 0.5% in 2013 and 1.7% in 2014, while France is expected to grow 0.2% this year and 0.9% next.

Data provider Markit said Tuesday its Purchasing Managers Index, a monthly gauge of activity in the U.K. services sector, rose to 62.5 in October from 60.3 in September. That is the highest level since May 1997, the month the Labour Party came to power under Tony Blair.

This is quite a turnaround for the U.K. economy which at the start of the year was supposed to be in jeopardy of a triple dip. The reality is that a housing-led recovery has turbocharged growth in the U.S. and in the U.K. In the U.K. for example, construction growth is at a six-year high. And the U.S. has seen less stellar growth recently in large part due to the rise in mortgages cooling off the housing sector. Net home orders for Q3 were down significantly in the U.S.

Notice how the projected growth numbers for both Germany and France are extremely weak for 2013 but better for 2014 – and still weak. The eurozone is going to be a laggard. There is no getting around this. And this makes sense given the policy response which includes an upcoming bank stress test and likely shedding of assets and potentially private sector bail-ins in extremis due to capital shortfalls.

I expect the ECB to act and move toward greater accommodation given the disinflation trend in the eurozone and the lack of fiscal policy space. But the ECB is out of bullets. There is no quantitative easing in Europe to goose asset prices. The most we can expect is for the ECB to lower rates and give even more dovish forward guidance. I expect the ECB to increasingly lean on forward guidance as a policy tool because rates are already at a record low. But I anticipate the disinflation path will continue because the deflationary fiscal policy response will overwhelm these moves. If Europe re-enters a recession anytime soon, we should expect to see deflation become a problem – and then the policy choices will have to broaden.