March 2010
Return to: Our market view
In the last edition of Investment News (December 2009), we asked “where’s the growth?” Since then, the question has lost neither its relevance nor its urgency. For all the media ballyhoo about the major economies emerging from recession, optimism about a sustainable global economic recovery has yet to be corroborated by hard evidence from the real world.
The largest driver of economic growth is consumption, which generally depends on income. Consumers’ income is mostly derived from employment. In the US, the headline unemployment rate is currently just below 10%. But buried beneath that statistic are sub-categories of people who are out of work but who do not meet the particular definition of unemployment (no work, but actively looking for a job in the last four weeks) that would move them into the headline number. Including those sub-categories, total US “labour underutilisation” is estimated at a worrying 17%.
No work, no consumption
Even still-employed US consumers have little motivation to consume: banks are not lending (which is severely impacting smaller businesses’ hiring ability), the Federal Reserve has announced plans to withdraw its support for the residential mortgage market and, with many companies reducing headcount, job security is a distant memory. This cocktail does not bode well for domestic US consumption.
Closer to home, the financial position of several European countries is perilous and likely to worsen if not addressed soon. Should bailouts be necessary to restore the finances of Greece or other fiscally errant EU member states, they are likely to be subject to the implementation of austerity measures that will inevitably weaken consumption in those countries, at least in the short-to-medium term. Unemployment is worsening in the two largest eurozone economies, Germany and France, and also in the UK, which has borne the brunt of the fallout from the financial crisis among the major EU economies.
Eastern promise
With little to cheer about in the US and Europe, growth optimists have pinned their hopes on the ability of emerging markets to enable a global recovery. In particular, China has inherited the mantle of “growth locomotive” from an incapacitated US. However, China’s strong growth trajectory, a surge in domestic lending and soaring property prices have made the authorities nervous about future inflation. Recently, the central bank announced plans to increase banks’ reserve requirements and curb lending, in a conspicuous attempt to relieve rising consumer and asset price pressures. (Some analysts expect the central bank to raise interest rates soon.) As well as undermining domestic growth prospects, there are fears that slower loan issuance may ultimately depress consumer and industrial demand to a degree that could result in a slump in prices for “hard” commodities such as metals, of which the Chinese have hitherto been aggressive buyers, thereby adversely affecting the economies that export such raw materials.
Such regional concerns notwithstanding, the most important factor that will determine whether or not a sustainable upswing is possible is the timing of the withdrawal of central bank/government stimulus measures. While growth in some emerging market economies is probably sufficient to begin that process already now (and avert inflationary pressures further down the road, as China is doing), the major western economies are less well positioned: if taxes and/or interest rates are raised too soon in those countries, there is a clear risk that the nascent global economic recovery will falter and usher in a new recession. For now, the recovery remains essentially fragile.