>Nothing to fear, but fear itself (DANSKE MARKETS)

■ The recovery is looking increasingly robust as the labour market is turning and underlying domestic demand has improved faster than expected. Downside risks from a jobless recovery are now limited.

■ The debt crisis in Europe is the main risk. It is already taking a toll on growth via deteriorating financial conditions. If market conditions do not improve a more pronounced slowdown is in the offing for H2.

■ In any case the manufacturing cycle is set for a slowdown in H2 as inventory dynamics turn less favourable. Leading indicators, including the ISM, will start moving lower very soon.

■ The longer-term outlook is for moderate growth with tough fiscal consolidation and financial regulation ahead. Easy monetary conditions and pent-up demand are expected to support above trend growth.

■ Inflation pressure is expected to remain moderate. Core inflation will bottom around 0.5% late this year and move only gradually higher. Headline inflation is expected to remain below 2% throughout the forecast period.

■ Financial turmoil will delay the initial Fed rate hike to March 2011. This will be preceded by verbal preparation of markets and liquidity draining. An escalation in market stress could reverse this process and force the Fed to reintroduce credit and liquidity programmes.

A more robust recovery

Following a solid Q4 with 5.6% q/q AR growth, the economy performed close to our expectations printing 3.0% q/q AR growth in Q1. The recovery is now looking increasingly robust as job growth has returned and consumers are ramping up spending. While there are still pockets of weakness in housing and commercial construction, the recovery has broadened with all other sectors showing progress.

Over the past few months data has been picking up further, suggesting a reacceleration in growth. Consequently, we have revised Q2-Q4 GDP growth up to 3- 3.5% from 2.5-3% q/q AR previously – a revision that would have been even bigger if it was not for the recent financial turmoil. The forecasts for annual growth in 2010 and 2011 have been upped to 3.3% and 3.2% vs 3.2% and 3.0% in Global Scenarios March 2010.

Generally, we continue to expect a moderate recovery compared with historical standards and relative to the depth of the recession, as fiscal contraction and financial regulation is set to cap growth in the medium term (see Global Scenarios, March 2010).

To read the full report: MACRO RESEARCH