European Union flags.
(photo credit: REUTERS)
The US and UK economies will continue the current healing process, accompanied by an eased stimulus; Europe and Japan will continue facing headwinds, and their central banks will continue their monetary expansion policies; and emerging markets will likely deliver tepid growth, with each country facing its own limitations.
Last year, the International Monetary Fund (IMF) projected that by 2015 the global economy would be growing at 4.8 percent. However, with the exception of the US, this recovery is taking longer than expected. The IMF’s reduced economic forecast for 2015 now predicts global GDP growth of 3.2%, with the US growing at 3%, the Eurozone growing only 1.3%, Japan growing 0.8% and China growing 7.1% (which would be its lowest GDP growth in 15 years).
The US continues to lead the global economic recovery as corporate profits maintain stable growth, unemployment falls below 6%, and both inflation and interest rates remain low. In the UK, a steady recovery now confronts signs of cooling in the London housing market, and wage increases remain elusive. Inflation there has been lower than anticipated, but that is a natural result of low rates of money and credit growth. The UK economy is recovering, albeit at a slow pace, while trying to fend off the threat of a weakening Eurozone and uncertainty surrounding global markets. Unemployment has fallen faster than expected over the past year and is now below 6%, while inflation remains benign. The primary downside risk to Britain’s recovery is the continued weakness in Europe, which may infect Britain because of their very close economic ties.
Turning to the Eurozone, weak economic data continues to come out of the continent, as fears of deflation increase. The European Commission again lowered its growth forecast, and the European Central Bank (ECB) indicated it will continue to take measures to stimulate growth. However, with rates already at 0.05%, the ECB could be running out of levers to pull. It remains to be seen if the ECB’s announced asset purchase – starting with asset-backed and possible non-financial corporate debt – will be enough to stimulate growth and counter deflationary pressure.
The euro is likely to come under continued pressure, primarily because of the fundamental differences between the various economies that are artificially tied together under its banner. Germany has the wallet but not the will to spend, while for Greece it’s the other way around.
Putting a further drag on a global recovery are the BRIC nations – Brazil, Russia, India and China – as well as Japan and parts of the Middle East. That leaves three of the big four economies – Eurozone, Japan and China – still trying to get a footing on a recovery or, in the case of China, facing slower economic growth.
In the second quarter, Japan’s upswing of 2013 and early 2014 – largely prompted by Abenomics – came to an abrupt halt. In April, there was a damaging hike in the consumption tax. Ahead of that tax increase, spending had been very buoyant. Since then, it has fallen sharply. During the third quarter, Japan slipped into a surprise downturn. Two consecutive quarters of decline mean that Japan has now entered its fourth recession since 2008.
The depressing and worrying statistic out of Japan is that it is now selling more adult diapers than children’s diapers because of the aging demographics. In fact, Japanese paper companies Daio and Nippon Paper are expanding their manufacturing facilities for what are politely called "incontinence products." Japan has the highest percentage of over-65s in the world, making up more than 20% of the population. Despite the stimulating policies of Abenomics, Japan seems to be unable to decisively move beyond the stagnation of the past two decades. Several countries in Europe are on the same trajectory.
Emerging market growth is expected to slow, but should it continue on a steady decline, the impact on the overall global economy may be manageable. Additionally, many analysts believe that even with slowing growth, some emerging market equities with compelling valuations remain attractive and look cheaper than other markets. Emerging economies that are highly dependent on exports, such as China, could see underperformance in equities. This is particularly true if growth slows significantly as the country moves from a manufacturing economy to one of consumption. In addition, as a major importer of raw materials in support of manufacturing, a 2015 China slowdown would affect resource-rich exporting countries in Asia, Africa and Latin America. Other emerging market economies showing increasing domestic demand such as Colombia and Indonesia or stronger ties to the US could see better performance.
Latin America is expected to remain healthy. Even with overall growth in the region likely coming in slower than estimated, foreign capital flowing into emerging markets is expected to be robust. In June, the World Bank’s global outlook estimated GDP growth for the region to reach 2.9% in 2015, up from an expected 1.9% for this year. But recent weak economic data out of Brazil (including real GDP contraction over the last two quarters); potential weakening of the Brazilian real; and uncertainty in the current post-election environment show that analysts are now expecting little GDP growth in 2015.
Meanwhile, in Eastern Europe, the ongoing Ukraine-Russia conflict has meant that markets remain uncertain. Although up 6.5% from the beginning of the year through November, the MICEX stock index remains volatile -- just recently returning to its level pre-conflict -- due to ongoing sanctions against Russia, a weakening currency and increasing government bond yields. Russia in particular is severely impacted by the rapid decline in oil and natural gas prices, and this could have important repercussions in the coming year.
A symptom of the sub-par performance of the global economy over the past three years – in developed and (especially) emerging markets – is the stagnation of world trade. Exporters and resource-rich countries have been badly affected, with a resulting decline in their currencies. The long road ahead is an uphill journey with uneven distribution of gain and pain among the various countries and industries.
Investors would be well advised to overweight the US and the UK and the US dollar in designing their core portfolios.
The writer is a licensed financial wealth manager. He is the founder of Commstock Trading (1881) ltd, a Jerusalem based international brokerage firm specializing in asset management and licensed by the Israeli Securities Authority.