Click here for part 2--'The Current Outlook for 5 Major Asset Classes'.
Despite some recent weaker-than-predicted economic and survey data, most commentators still expect the global economy to have bottomed in the fourth quarter of last year. Slower growth appears in prospect for the current (second) quarter, following likely above-trend growth in the first, but a gradual acceleration is generally expected over the second half of the year. This view is not dissimilar to that of the IMF which, in its April World Economic Outlook, raised global growth forecasts for both this year and next to 3.5% and 4.1%, respectively. It continued to warn of the fragility of the recovery, however, and that “downside risks continue to loom large”, particularly in Europe.
Given a recession is spreading across much of Europe, there is a natural focus on the affect this is having on world output. It should be remembered, however, that emerging countries now match the main OECD countries in terms of overall GDP on a PPP basis (roughly 45% apiece) and, when viewed from a contributions perspective, emerging markets will account for somewhere close to 75% of world growth this year.
Of the main economies, only the US, China and the UK have so far published Q1 GDP reports. While all the main headline figures were below consensus expectations, a more detailed analysis of the data produced fairly limited changes to year-end forecasts (shown in the below table).
*Average of leading investment houses with last month’s figures in brackets
†Based on PPP weights
Currently, economic trends are not easy to divine with one commentator noting that, with regard to economic forecasting, it is difficult to tell if the tide is still going out or if it has started to come in. US Q1 GDP figures provided a good example: headline growth of 2.2% was lower than forecast and well below Q4’s 3.0%, but excluding contributions from inventories US final sales were actually stronger in Q1 than in Q4. The quarter was boosted by one of the mildest winters on record but conversely suffered from a near-20% rise in petrol prices. The contribution from residential housing soared, yet capex spending was weak. So trying to identify definitive trends is no easy task.
The UK presented similar problems as the economy fell back into “technical” recession (two consecutive quarterly declines in GDP). Many commentators were baffled by this outturn, however, with the Goldman Sachs UK economics team declaring the figures “unbelievable”, given the Q1 strength of business survey data. China was little better, with a whole raft of official and survey data producing a mixed picture while Europe’s PMIs are at odds with local business surveys.
Where consensus can be found (although of course it is often wrong), general expectations are for continued moderate but sub-trend growth in the US, no hard landing in China, on-going stagnation in the UK and a mild recession in Europe. But, as the IMF pointed out, downside risks to the global outlook remain elevated.
Europe remains at the epicentre of concerns with bond yields surging in Spain and Italy during April following their prior LTRO-inspired decline. Doubts have grown that Spain will be able to avoid turning to the EU/ECB/IMF for financial support while the austerity programme, with the recently agreed “fiscal compact” at its core, is being seriously questioned and under increasing political pressure. The Dutch lost a government and the “Merkozy” era is over with the election of a new socialist president in France, M.Hollande, who is keen to see a “growth compact” accompany necessary fiscal consolidation. This opens up another whole can of worms for Europe and investors!
So far, financial markets have reacted relatively calmly to recent developments with indicators of systemic risk barely changed. In general, bond and equity markets have reflected idiosyncratic risk in individual countries, i.e. during April the Spanish equity market fell 13% compared to the 3% fall in the German DAX and a 2% decline for world equities. That is not to deny that there were some elements of a “risk off” trade during April as the yen rallied, German bunds hit record low yields and defensive equity sectors generally outperformed.
Click here for part 2--'The Current Outlook for 5 Major Asset Classes'.
