Tags: OECD | unemployment | US | eurozone

Prepare for a Rising Interest Rate Environment

Tuesday, 16 July 2013 11:26 AM Current | Bio | Archive

On Monday, China, the world's second economy, confirmed a slowdown in its gross domestic product (GDP) growth rate to 7.5 percent. While down from the 7.7 percent in the first quarter, it equals the country's official growth-rate target of 7.5 percent for 2013, which was set four months ago at the annual National People's Congress. If the full-year GDP comes in as "planned," it would be the lowest growth rate since 1990. By the way, growth was 14.2 percent in 2007.

Long-term investors should take notice that China's fiscal revenues for the first half of this year grew only 7.5 percent year-on-year, which was substantially below the 12.8 percent growth we saw in 2012 and the 24.8 percent growth in 2011. Overcapacity and sluggish demand are blamed for the slowdown in tax revenues.

Interestingly, last Thursday, Chinese Finance Minister Lou Jiwei, speaking in Washington, said: "Our expected GDP growth rate this year is 7 percent," which implies an average growth rate of somewhere around 6.5 percent in the second half of the year. Of course, that's not written in stone, but nevertheless gives us a hint at the size of growth the Chinese leaders expect. Meanwhile, nothing whatsoever gives us assurance that China isn't going to "stumble" or experience a hard landing before 2014 is over.

Also, don't overlook the fact that China calculates its GDP numbers on the levels of production, while in the West, we calculate it on a "final sales" basis."

As China has been the unique real global growth engine, one could ask themself where real and sustainable global growth is now going to come from.

Besides the United States and Japan, most all other important countries are now expecting slower growth, with Europe remaining in the doldrums at close to zero growth at best.

In this context, today, Jorg Asmussen, a member of the executive board of the European Central Bank, sounded not optimistic at all when saying in a speech recently that the adjustment process of European economies in the wake of the financial crisis will last at least another 10 years. I'd like to add, "Who knows what can happen in those 10 years?"

In a broader context, the Organization for Economic Cooperation and Development (OECD) released its "Employment Outlook 2013." In this 270-page report, it states that the jobless rate in OECD countries will only come down slightly by the end of 2014, from 8.0 percent today to 7.8 percent, which means in clear English that 48 million people will remain out of work in the 34 OECD countries.

The United States is projected to see its unemployment fall to 6.7 percent by the end of 2014, from 7.6 percent today. In the eurozone, unemployment is expected to rise from 12.2 percent to 12.3 percent, while Germany is expected to see a decline to 4.7 percent, from 5.3 percent today.

In the rest of Europe, joblessness will remain flat or even rise in many countries. By the end of 2014, unemployment in France is expected to be at 11.2 percent (10.9 percent now), 12.6 percent (12.2 percent now) in Italy, around 27.8 percent (26.9 percent today) in Spain and 28.2 percent (26.8 percent today) in Greece.

When I see these projections, which are, besides a few exceptions, simply "bad," and I hear French President Hollande on Sunday at the "Bastille day" festivities, saying France is "in" recovery, I know that when the president of the second-largest economy in Europe is in such a state of denial that nobody should be surprised it's going to get worse first before it gets better in the eurozone.

Unfortunately, for the rest of the world economy, the drag that represents the eurozone crisis is immense and extremely dangerous and will continue to negatively impact at least all 34 OECD countries.

Now that the OECD has publicized its expected unemployment number for the United States at 6.7 percent by the end of 2014, we'll have to wait to hear what Federal Reserve Chairman Ben Bernanke will say in his "last" prepared testimonies on Wednesday and Thursday before, respectively, the House Financial Services Committee and the Senate Banking Committee.

I don't know if his testimony and comments will rock the markets, at least in the short term. What I do know is that the Fed chairman will speak on behalf of the Federal Open Market Committee as a whole and not on his own.

Finally, as far as my personal preferences are concerned, I can't detect any solid reason for moving away from the United States as a whole, as well as from the U.S. dollar. If the OECD is right about the U.S. unemployment number of 6.7 percent by the end of 2014, time is approaching rapidly to prepare, as a long-term investor, for a rising U.S. interest rate environment.

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f the OECD is right about the U.S. unemployment number of 6.7 percent by the end of 2014, time is approaching rapidly to prepare, as a long-term investor, for a rising U.S. interest rate environment.
Tuesday, 16 July 2013 11:26 AM
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