US jobs fell by 345,000 in May – the smallest decline in
eight months and below expectations. In the US, stronger consumer confidence,
higher retail sales and housing market stabilisation are encouraging. In the UK,
there are signs of improvement in manufacturing, services and housing. In China,
manufacturing growth is strengthening and the outlook is distinctly better.
The US jobless rate rose to 9.4% – the highest since 1983. The eurozone
situation is very disturbing: unemployment rose to a 10-year high, while
manufacturing and service sector figures were poor.
At $70 per barrel, oil prices have more than doubled since their February lows,
but this does not prove that the recession is at an end. Demand for oil has not
risen significantly and much higher oil prices probably signal inflationary
expectations. OPEC’s stranglehold on supplies may push oil prices to levels that
could throttle any genuine recovery.
Rises in bond yields on both sides of the Atlantic, though partly reversed,
also reflect fears of inflation. Such fears are justified in the medium term,
but are misconceived in the near future. Some major economies are experiencing
deflation, not inflation.
Declines in the US dollar were seen as a reaction to increased risk appetite, as
investors abandoned the dollar’s relative safety in search of higher returns.
But risk appetite is waning, as concerns over the recovery resurface and there
are signs that dollar weakness reflects concerns over the US fiscal position and
its international credit rating. Standard & Poorís downgrade in the outlook
for UK’s AAA sovereign credit rating has prompted fears that US debt may also be
Ending the recession remains the key policy imperative. Preventing an
inflationary surge will require difficult ‘exit strategies’, but only after the
economy stabilises. For now, we must persevere with aggressive policy stimulus.
If central banks start tightening too early, they would abort any recovery and
trigger new declines.
David Kern of Kern Consulting is economic adviser to the British Chambers
of Commerce. He was formerly NatWest Group chief economist
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