Tags: OECD | US | GDP Fed

Be Ready to Re-Adjust Quickly

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Tuesday, 19 Nov 2013 11:17 AM Current | Bio | Archive

The Organization for Economic Co-operation and Development (OECD)'s bi-annual economic analysis shows overall world GDP growth is expected to continue, albeit at a slower pace, now at 3.6 percent and down from 4 percent it estimated in May.

We need to take into account rising risks, of which the "unavoidable," at least in my opinion, fact the Federal Reserve should probably start tapering at some time next year. That by itself could become a very important headwind for many, if not most, of the emerging economies with one big exception for the mainland of China that doesn't include Hong Kong (!),because China has been so far this year the only large economy in the world that started tightening its monetary conditions in the first half of 2013, which it interrupted during the summer with a mini-stimulus and now is back to tightening mode once again.

Yes, growth and the employment situation in the United States will be key in 2014 and 2015 to when, not if, the Fed will start tapering and eventually what it does beyond, and how that could create seriously damaging headwinds for many of the emerging economies.

Yes, the path to restoring "normal" financial conditions in the United States could become, to some degree, "disruptive" to a lot of emerging economies. In my opinion, there will be no way around it. And I wouldn't bank on Janet Yellen, if confirmed as Fed chair, for help.

The OECD expects U.S. "real" GDP to grow by 1.7 percent this year, 2.9 percent in 2014 and 3.4 percent in 2015; unemployment should come down to 6.9 percent in 2014 from 7.5 percent this year and down to 6.3 percent in 2015; consumer prices are expected to move up to 1.8 percent in 2014 up from 1.5 percent this year (watch out for the beginning of rising inflation expectations, which the Fed can't ignore!) and 1.9 percent in 2015; and while long-term interest rates are expected to move up (on average) to 3.1 percent in 2014 and 3.8 percent in 2015.

Interesting for long-term investors is the fact that "normalization" of interest rates, which means higher, in the United States seems irrevocably taking hold in institutions' expectations like those of the OECD.

Looking at these data, as a long-term investor, I wouldn't take on risk in emerging economies as a whole for the very simple reason that their period of "catch-up" growth, which has been financed in large part by limitless availability of extremely cheap U.S. dollars, thanks to the Fed's QE policies, will probably be coming to an end, earlier than generally expected until now.

Of course, as always, there will be those exceptional kind of exceptions that will prove the rule, but these are only for "sale" to a very few, of which it's very difficult to be part of.

When I look at the OECD data, I can't get excited about the euro area. On the contrary, I can't share all the hyped optimism about the eurozone we see these days. To me we'll have to go back to fundamentals and maybe sooner rather than later.

In sharp contrast to the United States, the euro area real GDP growth is expected to remain anemic and certainly not at "escape velocity." It is expected to come in at 1 percent in 2014, up from -0.4 percent this year, while 2015 is expected to see growth at 1.6 percent; unemployment should remain "dangerously" high at 12.1 percent in 2014 and 11.8 percent in 2015; consumer prices should only rise by 1.2 percent in 2014 as well as in 2015, which should put the European Central Bank further on alert for deflation risk that is still out there underneath the surface and knowing that once deflation pops up it is extremely difficult to eliminate it; and finally long-term interest rates are expected to move up to 3.2 percent in 2014 and 3.5 percent in 2015, which should be more or less in line with U.S. long-term interest rates' expectations.

If the outlook of the OECD is right we shouldn't expect quick abrupt changes in mainland China over the next couple of years, which in fact confirms the intended reforms as they were were announced by the third plenum of the Chinese Communist Party and that have to be viewed totally separate from Hong Kong where, by the way, long-term investors should keep in mind the housing sector in Hong Kong could easily take a hit of 30 to 50 percent once the Fed tapering gets underway.

Anyway, once again, investors will have to face reality that markets not only can go up. No, this time will not be different.

To keep it simple, as a long-term investor, I would keep the United States on top of my preference list. However, I wouldn't become complacent at all and I'd keep a close eye on, at the beginning of 2014 we get a nasty re-run of the debt ceiling debacle. As the OECD Economic Outlook says: "The episode of budget brinkmanship in October 2013 has once again shaken global markets and harmed consumer confidence."

Yes, one should always be ready to re-adjust quickly.

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HansParisis
The Organization for Economic Co-operation and Development (OECD)'s bi-annual economic analysis shows overall GDP growth in the 34-member countries is expected to continue, albeit at a slower pace, now at 3.6 percent and down from 4 percent it estimated in May.
OECD,US,GDP Fed
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2013-17-19
Tuesday, 19 Nov 2013 11:17 AM
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