In the past weeks, we saw a lot of positive news regarding the economy. The number one headline was the announcement that the US economy had climbed out of the recession in the third quarter with an annualized growth rate of 3,5%. Still, many observers were quick to dampen any euphoria that such news might cause. And with CIT, a large US bank and important lender to US medium-sized and small businesses, filing for bankruptcy, their arguments that the economy is still showing substantial weakness seem to be supported.
Still, such calls for caution slightly annoy me. You cannot deny that the outlook for the world's economy looks a lot rosier than a year ago. Of course, the situation looks worse than say, two years ago, but what had you expected? That the world economy would return to pre-crisis growth rates just like that? In the past decades, the US built up a huge bubble based upon unsustainable credit largesse. Of course, it is going to be very painful to find an economic alternative for that in the US. We don't want the US to just start blowing air into the burst bubble again, do we? Is it strange that a bank like CIT, depending on fragile companies paying back their loans goes broke? The reaction of financial markets, with no renewed sell-off, indicates that it was not surprising. Of course, recent growth was due to government economic support programs. And indeed, some of these programs expire or have expired. But were they ever meant to be a continued source of income for the industry? I don't think so. They were supposed to kick-start the economic engine. And the 3,5% figure for Q3 seems to indicate that the policy has achieved that goal.
What annoys me about the cautious tone in the media is its effect on consumer's psychology. If anything, the crisis of the past twelve months was a crisis of trust. Loss of trust in the banking system created the credit scarcity. And loss of trust with consumers created the backdrop in consumption that caused the industrial crisis. Therefore, all of us should hope that this positive news inspires trust in consumers. After months of quiet, the economic engine is producing some noise. We now have to pour in the fuel of extra spending to make it roar again. Will we spoil the successful kick-start by falling back to the economic gloom that we have grown accustomed to in the past year? My great inspirer Karl Popper famously said that optimism is a moral duty. I would like to add that today, it is an economic duty.
The most positive news that I recently heard came from the key steel sector. Mister Lakshi Mittal announced that he can start firing up more and more steel furnaces. And overall the steel sector expects demand to grow by 9,2% in 2010. If demand of steel is picking up, it is a clear sign that industrial output is on the rise again. The most positively surprising news comes from China. This country doesn't stop surprising the world by doing better than expected. It has announced a growth rate of 8,9% for the thrid quarter of 2009! So, if you are looking for an explanation for rising oil prices, here you have one. Some observers even start to worry that energy markets become too dependent on Chinese growth figures.
If steel furnaces are producing again, if China keeps on growing, it means that worldwide demand for energy is rising. The bearish momentum for energy prices is weakening every day. We have already observed this in oil prices. European gas and power prices are still holding close to their historical lows. As always, the European economy is slower in its growth than other parts of the world. With many industrial companies still at very low output levels, the demand for energy is not growing fast enough for gas and power prices to react. But how long will this last?