Last week, the spring meetings of the International Monetary Fund (IMF) and the World Bank and the G20 Finance Ministers and Central Bank Governors were held in Washington, D.C.
As usual, at those kinds of gatherings, you don’t learn a lot besides what you already knew before. Nevertheless, what stood out this time, especially for the developed economies, was that nobody seems to have a clue on where sound and durable growth is going to come from and how real unemployment can be brought down in a sustainable way in the near future.
The IMF steering committee finally stated: “We need to act decisively to nurture a sustainable recovery and restore the resilience of the global economy.” But they fell short, which is understandable, on how that could be achieved in a world where the so-called global recovery is completely out of sync. Specifically, the eurozone is firmly stuck in a recession, Japan is in stagnation at best that is aggravated by continuous deflation, the United States is facing sluggish growth and finally emerging economies are experiencing somewhat better growth.
Christine Lagarde, managing director of the IMF, nailed it very well: “It’s not the healthiest recovery … the pickup in financial conditions, financial markets, is clearly not translating into a sustained pickup in growth and jobs.” From his side, Tharman Shanmugaratnam, deputy prime minister and minister for finance of Singapore and chairman of the International Monetary and Financial Committee, in fact completed her statement saying: “The commodity that is in shortest supply now is confidence.”
In my opinion it will be extremely difficult to build confidence in the near future when you see, once again, growth slowing in different, extremely important places in the world.
In this context, the HSBC Flash China Manufacturing Purchasing Managers’ Index (PMI) unexpectedly disappointed the majority of market watchers by coming in at 50.5, down from 51.6 in March and only barely above the 50 line where contraction starts.
As a long-term investor, I would remain extremely careful on pinning any hope whatsoever on China growing in such a way it could help global growth/recovery. China’s internal debt continues to rise past already unsustainable levels and could easily end up in a disaster, which would dwarf the U.S. subprime mortgage crisis that led to the Great Recession, and that would oblige, when it happens, Chinese authorities to force slowing the country’s economic growth further and beyond what otherwise would normally be expected.
Besides, China’s state-run Xinhua news agency updated the number of confirmed H7N9 bird flu virus cases to 104, including 21 that have ended in death. It’s still way too early to speak of real risks of a pandemic situation in the making similar to the severe disruptions and damages caused by the swine flu strain H1N1 in 2009, but it is time to get this under control, as the H7N9 has demonstrated a mortality rate of 20 percent so far. Only time will tell if that is doable, but long-term investors would err by not putting that risk element on their radar screens.
As expected, at least from my point of view, the Markit Flash Eurozone PMI points to continuous steep downturns in France, Spain and Italy. What was not expected is that Germany now is also fully in contraction zone territory, with all of its indexes coming in below the 50 contraction line.
I don’t think it’s an overstatement to say the eurozone is in deep trouble with no light at the end of the tunnel. All possible outcome scenarios are disasters in the making.
Analysts at Credit Suisse said cuts from the European Central Bank (ECB) at its next meeting should be expected because of the more-than-worrisome Eurozone PMI. For what it’s worth, on Monday ECB Vice President Vitor Constancio said inflation in the eurozone had fallen “rather significantly” and a rate cut was “always a possibility.”
Also, Jose Manuel Barroso, president of the European Commission, said EU austerity policy, as it has been mandated in recent years, has reached its limits as it has no more the necessary public and political support. I’m really interested to see with what kind of “adjusted” policies Brussels will come up with as they are used to, at least until now, implementing plans without plan Bs.
To have a little bit of a down-to-earth idea of where the global economy is heading, I look at the quarterly performance of Caterpillar, which is the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. In the first quarter, the firm earned $880 million, which was down 45 percent from a year earlier when it came in at $1.59 billion. Its global work force fell 7.5 percent during the first quarter of 2013, coming down from 152,604 to 141,193. Caterpillar worldwide full-time employment was down to 124,874 from 127,238 a year ago. This is not necessarily a disaster, but certainly important enough to keep an eye on and a confirmation that global growth is moving downward.
In the United States, the Chicago Fed National Activity Index (CFNAI,) which is a weighted average of 85 existing monthly indicators of national economic activity, came in below historical trend at -0.23, down from +0.76 in February, with consumption and housing down the most, while employment and sales/orders/inventories came in at below trend also. Only the production indicators were positive.
To me all this means growth in the United States will continue at a slow pace, but it probably will not accelerate to a sustainable level any time soon. Yes, the Federal Reserve’s quantitative easing policy will remain in place for the time being.
That said, and even when the IMF warns the credible medium-term fiscal consolidation plans remain crucial, in particular for the United States and Japan, I still believe the United States, which includes the dollar, remains the best location for long-term investors.
Please don't get me wrong. I don't say I would invest now in equities, as I still remain convinced we’re closing in on a correction in the markets. Of course, I could be wrong as is anybody else.
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