As said on this blog previously, Europe will surely be weak economically this year, but probably not as weak as many fear. The reason: the rest of the world—which is stronger—will drag it forward.
A prevailing worldview among economists is that a weak region will “infect” the rest of the world. This can sometimes be true, but usually the opposite is true: a stronger rest of the world keeps the weak region afloat. Europe is big, sure, but the rest of the world is far bigger, and that features the US and Emerging Markets—two relatively strong areas.
Recent data is confirming this notion:
January Eurozone Flash Composite PMI Points to Growth, Beats Estimates
Actual: Manufacturing: 48.7, Services: 50.5, Composite: 50.4
Bears have been confounded by the global economy’s resilience of late. No double-dips in 2011, and much of the world’s growth is currently accelerating.
As I said on Real Clear Markets in November, the global economy can weather turbulence and weakness in Europe better than most expect. And while many think of EU weakness “infecting” the rest of the world, actually the opposite seems more likely: a stronger rest of the world could drag the EU with it. Check out this headline from Bloomberg earlier this week:
Global Manufacturing Displays Resilience to Euro Crisis: Economy – Jennifer Ryan
Happy New Year everyone!
Andy Kessler’s Op-Ed in Tuesday’s WSJ is a must-read tied to the trends in overall standards of living and availability of products. He touches on income disparity—I’m not going there but you can make your own conclusions. Kessler’s perspective is most useful for putting into context capitalism and the boons it brings to wide swaths of the population over time. My favorite part:
“Just about every product or service that makes our lives better requires a mass market or it’s not economic to bother offering. Those who invent and produce for the mass market get rich. And the more these innovators better the rest of our lives, the richer they get but the less they can differentiate themselves from the masses whose wants they serve. It’s the Pages and Bransons and Zuckerbergs who have made the unequal equal: So, sure, income equality may widen, but consumption equality will become more the norm.” The Rise of Consumption Equality – Andy Kessler
And, check out the website to my class at Cal Berkeley here: http://www.fisherinvestments.org
The week ending December 2nd wound up being one of the best for the global stock market in years—and that’s saying something considering the rocket-ship takeoff in stocks back in ’09.
What’s amazing is, after a few bad weeks in November, there were all sorts of headlines declaring no chance of the fabled “Santa Rally.” Really? With all this volatility and a whole month to go?
Whether we get a nice rally to end the year or not, this is just another example in what’s been a year of manic, myopic sentiment—taking a few weeks (or even a few trading sessions) and extrapolating that trend out further into the future.
Despite all the teeth gnashing this year, global stocks are down a few percent on a total return basis, and the S&P 500 is up a little. It’s a year that’s confounded both bulls and bears.
A significant deceleration in the annualized GDP growth rate of the US or global GDP does not necessarily imply a recession. More often than not, decelerations prove to be temporary slowdowns within an expansion.
Initial Black Friday weekend sales reached historic highs. Are shoppers pulling forward some purchases to take advantage of the “doorbuster” deals? Sure. But the numbers are too big to ignore. Both traffic and spending were up significantly for shoppers online and in stores as total weekend spend reached a record $52B (+16.4% Y/Y).
- Surveys estimated that 226 million shoppers (+6.6% Y/Y) visited stores and websites over the Black Friday Weekend.
- The average shopper spent approximately $398.62 (+9% Y/Y).
- Online spending rose an estimated 26% to $19.8B.
It’s just another in a long line of strikes against reductive macroeconomic “logic” that mostly says this should never happen given high unemployment and stagnant real wage increases among middle and lower classes.
Source: National Retail Federation
According to Fisher Investments analyst Brad Pyles (read more of his work here):
The European Union (27 countries including the UK ) represents roughly 26% of global GDP. This is similar to Asia at the end of 1997. As Asia went through its own solvency crisis (better known as the Asian Contagion), its GDP fell -0.6% in 1998 (see table below). While this caused Asia to underperform, it did not cause a global bear market. Furthermore, when you exclude China (whose GDP dropped near a two decade low but remained above 7% y/y), Asia’s GDP dropped -1.9% in 1998 while composing a slightly smaller percentage of global GDP than the current EU, but still a larger portion of global GDP than the current EMU.
This appears to show that a large portion of the global economy can modestly go negative for an extended period of time without causing a bear market, provided the global financial system remains intact and the rest of the world continues to grow. Consider that even the large 1998 correction did not occur until the Asian Contagion’s secondary effects took down Long Term Capital Management and threatened the global financial system.
With much hubbub about what a European recession might do to the US , particularly since exports are a significant portion of the economy, the analysts at Fisher Investments took a peek at US export exposure to the region (see below).
It’s pretty clear that—while there of course would be additional knock on effects to a recession in a region as big as the eurozone—the US is not headed for automatic economic doom as a result of its trade there. As of June, US exports to Italy were a little over 1% of total exports; Spain is even less, coming in at roughly 0.7% of total exports; even Germany (the healthiest of the bunch) is well under 4%.
Have a great Thanksgiving weekend!
US Leading Economic Indicators rose sharply, well more than expected in October. Why’s that important? Remember, just a few weeks ago, how recession not only seemed a foregone conclusion, but some experts even believed we were already in one? Through history, LEI generally needs to turn significantly negative in order to get a recession. That’s not where we are today.