Tags: Gold | dollar | economy | euro

Global Economy Is Growing Far Too Slowly to Overcome Increasing Risks

By    |   Tuesday, 17 July 2012 11:28 AM

In its just released World Economic Outlook, the International Monetary Fund projected slower growth than previously expected everywhere from the United States to Europe to China.

Global growth is projected to slow 3.5 percent in 2012, from the previous estimate of 3.6 percent in April, and 3.9 percent in 2013, from 4.1 percent expected previously. Growth in advanced economies is projected to expand 1.4 percent in 2012 and 1.9 percent in 2013, while growth in emerging and developing economies is estimated to expand 5.6 percent in 2012 and 5.9 percent in 2013.

In April 2011, the IMF projected world gross domestic product to grow 4.4 percent in 2011 and 4.5 percent in 2012 (down from growth of 5 percent in 2010), with advanced economies expected to expand approximately 2.5 percent and emerging and developing economies to grow at 6.5 percent in 2011 and 2012.

Global economic growth is certainly not moving in a “good” direction, and downside risks, coming primarily from Europe, have increased further.

In the United States, growth is slowing but remains positive, at least for the time being. But it is by far too low to make a serious dent to unemployment.

Investors should take care because dangers are lurking below the surface and in the coming months, we could face delays in raising the federal debt ceiling.

This would increase risks of financial market disruptions and dampen consumer and business confidence, making things worse than they already are. Another substantial risk could easily arise from insufficient progress in developing credible plans for medium-term fiscal consolidation in the United States.

Even Kansas City Federal Reserve President Esther George, who is an alternate member of the Federal Open Market Committee (FOMC), expressed her doubts when she said on Monday, “At this point we have a tremendously accommodative policy for the economy to begin the process of recovery. Will monetary policy put people back to work at this point? That's not clear.”

That does not seem supportive for a new round of quantitative easing.

In Europe, the IMF expects the eurozone to face zero growth at best, while the periphery eurozone countries, where structural issues remain unsolved, should face negative growth in 2012 and 2013. Besides Greece, the two most worrisome periphery countries are Italy, which is expected to contract 1.9 percent in 2012 and 0.3 percent in 2013, and Spain, which is expected to contract 1.5 percent in 2012 and 0.6 percent in 2013.

With these kinds of dismal growth forecasts, it is no wonder unemployment across the eurozone could soar by 4.5 million to almost 22 million by 2016 unless governments reverse austerity measures that are pushing their economies into recession.

Investors should not make investment decisions based on hopes and they should certainly not expect sound and sustainable reversals to happen anytime soon.

In emerging and developing economies, investors should take notice that commodity exporters are vulnerable to further erosion of commodity prices.

Moreover, in the medium term, there are tail risks of a hard landing in China, where investment spending could slow more sharply given overcapacity in a number of sectors.

Last week, we learned the value of China’s foreign exchange reserves declined $65 billion quarter-over-quarter, which was the largest quarterly decline on the average year-on-year growth rate. In June, China’s foreign exchange reserves grew by just 1.3 percent year-over-year.

Keep in mind that since 2001, the average year-on-year growth rate has been a little more than 30 percent. Given the importance of currency reserve diversification we have seen during the past decade, it could well be we are witnessing a fundamental shift in the underlying pattern of foreign exchange reserve growth.

Since the end of 2011, we have seen a sustained slowdown in China, intensification in the eurozone crises and a marked shift in the FOMC’s approach to monetary policy.

These are probably the main reasons why the pattern of Chinese reserve growth has changed so markedly. In my opinion, Chinese reserve growth will likely remain subdued for the foreseeable future, which should result, for diversification purposes, in low levels of demand for the euro for some time.

As a long-term investor, I keep an eye on the euro against the dollar, and also against gold.

Monday, gold ended in New York at $1589.90 per ounce, which was below its 200-day moving average (MA) of $1658.89 and below its 50-day MA of $1590.15.

In euros, gold ended the day in New York at 1296 euros, which was above its 200-day MA of 1266 euros and above its 50-day MA of 1264 euros.

When we consider, for a moment, gold as a barometer that measures the global economy and investors’ concerns about monetary debasement, we see that the world economy is still growing, but slowly and certainly far too slow to be good, and that the dollar is, at least for now, in better shape than the euro. Keep in mind that I am not saying that it is all OK with the dollar.

I do not expect this situation to change in the near term. As you know, I am under no illusion the eurozone can fix its crises (yes, plural) in the foreseeable future because of the profoundness and extreme complexity of the problems it is facing and for which it apparently does not seem to be able to find quick, sound, transparent, which means “understandable for the EU electorate,” durable solutions.

Besides, as seemingly nothing else is working for the moment, I think we can assume the European Central Bank will have to continue easing monetary conditions in the eurozone in an attempt to kick-start lending.

Therefore, and for all the reasons mentioned here before, not the least of which is China, I expect the euro to remain under sustained pressure for some time to come.

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Tuesday, 17 July 2012 11:28 AM
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