[ForexNews]

Current forecast is that the US (and European) growth recovery will be weaker than normal given the headwinds of a rising savings rate, still-high borrowing rates, restrictive credit and -- in the case of the United States -- an overhang of vacant housing . At first blush, this might seem inconsistent with the view that the production cycle may snap back more quickly. But in fact there is no real inconsistency.

The first and obvious point is that what many surveys point to currently is a sharp improvement in the rate of growth not necessarily a shift to good absolute growth. The rate at which the growth trajectory is shifting may be unusually rapid (and faster than expected) but in many places, the level of new orders and of activity general is still low. And so the surveys too are mostly about normalization from extreme contraction, not a sustained growth recovery. This characterization seems to fit the US and continental Europe well and suggests that with the possible exception of a month or two a sharp production recovery is probably not likely even if stabilization will happen sooner than many expected.

The second point is that in some places (particularly in Asia and parts of the emerging world) it looks as though industrial production was cut so brutally late last year on a precautionary basis that even with sluggish final demand there is scope for a period of relatively rapid production gains. For those areas that (unlike the US and much of Europe) saw catastrophic industrial news, there may be
scope for a period of better growth simply by unwinding a portion of the (excessive) damage done last year as the inventory cycle turns. And just as the market was surprised by the speed of the contraction, the speed of the near-term industrial rebound is probably also still running ahead of expectations.

Finally, the view of weaker than normal demand recovery is most clearly a G3 story. Analysts expect a more robust growth recovery in some other places. China is the most obvious, but even within the major economies some are more open to the idea of a reasonable growth recovery in the UK and Australia – and some other places where financial conditions have eased more sharply. As a result, production may genuinely rebound more strongly in these places or in places levered to their growth.