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John Zechner
November 3, 2014
While economic growth in the U.S. continues to be the pleasant surprise in the global picture, the same cannot be said for other key pieces of the global economy. The International Monetary Fund (IMF) dropped its forecast global growth in 2014 to 3.3%, unchanged from 2013, and to rise to 3.8 percent in 2015. The weaker growth outlook for 2014 reflects setbacks to economic activity in the advanced economies during the first half of 2014, and a less optimistic outlook for several emerging market economies. Two underlying forces are weighing on the global recovery, according to the report: “In advanced economies, the legacies of the pre-crisis boom and the subsequent recession, notably high debt burdens and unemployment, still cast a shadow on the recovery, and low potential growth ahead is a concern.”
The World Economic Report also pointed out that “Much of the projected strengthening in activity reflects faster growth in the United States following a temporary setback in the first quarter of this year. Employment growth has been strong, and household balance sheets have improved amid favorable financial conditions and a recovering housing market. In Europe, recent growth disappointments highlight lingering fragilities. A gradual, but weak recovery is projected to take hold, supported by a sharp compression in interest spreads for stressed economies and record-low long-term interest rates in core Euro area economies. In Japan, GDP contracted more than expected in the 2nd quarter of 2014 in the wake of an increase in the consumption tax. Looking ahead, private investment is forecast to recover and growth to remain broadly stable in 2015.” Emerging markets are adjusting to slower growth. Growth in emerging market and developing economies will continue to account for the lion’s share of global growth. Still, at 4.4 percent for 2014, the growth forecast is a bit weaker than in the April 2014 report. This slowdown is due to lackluster domestic demand and the impact of increasing geopolitical tensions, especially on Russia and neighboring countries. In China, growth is expected to decline slightly in 2014-15 to 7.4 percent, as the economy transitions to a more sustainable path. Growth is expected to remain strong elsewhere in emerging and developing Asia. In Latin America, the growth rate is forecast to decrease by half this year, to around 1.3 percent, due to declining exports as well as domestic constraints. Growth is expected to rebound to around 2.2 percent in 2015.
The recent weakness in Europe and continued slower growth in China are also seen in the weekly surveys from ISI Group in New York and shown below. These are corporate surveys with large companies that do business in those regions. While U.S. growth has continued to be strong, the numbers for sales to both Europe and China have stayed below the critical ‘50’ level that separate expansion from contraction. Without some pick-up in these numbers, it will become more difficult for the large, globally-oriented North American companies to maintain existing growth rates. This could be even more acute in the next few quarters as the export-oriented companies have to deal with the negative impact on trade of a stronger U.S. dollar.
While we continue to be concerned about excessive stock valuations and some slowing of growth, we are not expecting the global recovery to morph into a recession and are therefore not worried that the bull market that started in 2009 is coming to an end, just that it continues to be in need of a sharp correction (in the 10-20% range) to reduce excessive optimism and bring stocks back to a ‘buyable’ level again. The important point is that, unless interest rates are going to head higher or the global economy is going into a recession, there is no reason to expect a full ‘bear market’ in stocks (decline of more than 20%) for some time.
Our investment management team is made up of engaged thought leaders. Get their latest commentary and stay informed of their frequent media interviews, all delivered to your inbox.