Tags: US | Japan | GDP | growth

Where Is the 'Real Good' Global Growth Finally Going to Come From?

Tuesday, 30 July 2013 12:55 PM Current | Bio | Archive

This week we have literally a tsunami of important financial and economical data/events that will one way or another impact the markets.

On Wednesday, the Federal Open Market Committee (FOMC) will let us know its latest guidance and characterization of the U.S. economy and provide us with information on the Federal Reserve's buying of assets, which undoubtedly impacts longer-term yields. No change is expected in Fed's key policy rates.

"Traders," not long-term investors, will once again anxiously look for any hint on when the Fed could finally start "tapering." In my opinion, it doesn't matter when exactly tapering will start. I'm still convinced Fed Chairman Ben Bernanke will start tapering anyway before he leaves in January because of his "legacy" as a very important central banker, period.

Also on Wednesday, the first estimate of the second-quarter gross domestic product (GDP) will be released. It is expected to come in at somewhere around 1 percent, which is below the 1.8 percent growth rate in the first quarter, but above the 0.4 percent growth rate in the fourth quarter of 2012.

Long-term investors would do well to look also at the gross domestic income (GDI) number, which increased 2.5 percent in the first quarter after increasing 5.5 percent in the fourth quarter of 2012.

Please keep in mind that the GDP and GDI numbers tend to follow similar patterns of change over the longer term, but certainly not always over the short term.

One should also take notice the U.S. government will make a historical move on July 31 when it will apply for the first time the latest comprehensive revision of the "National Income and Product Accounts (NIPAs)," which include, among other things, expanded capitalization (cost of research, development and copyrights) of intellectual property products.

For the very first time the NIPAs will recognize private and government expenditures on research and development as "fixed investments." In my opinion, this is pure logic in today's "knowledge" society, which is based on the vast increase in data creation and information dissemination that results from the innovation of information technologies.

This new "fixed investment" class for the United States should further increase in importance in the foreseeable future. Interestingly, the United States ranked 5th (up from 10th in 2012) of the most innovative nations in the world in accordance to the Global Innovation Index 2013 (published by Cornell University, INSEAD and the World Intellectual Property Organization), while Switzerland ranked 1st (same place as in 2012), Sweden 2nd, the United Kingdom 3rd and the Netherlands 4th.

Please don't be surprised, but this latest revision of the NIPAs will probably boost the size (not the pace of growth!) of the U.S. GDP by about 3 percent since its latest big revision in 2009. FYI, 3 percent U.S. GDP growth equals about the GDP size of a country like Belgium. No, this revision was not "fabricated" by the government, but is part of a 2008 United Nations agreement and Europe will do exactly the same kind of revision for calculating its GDP numbers in 2014.

And then we'll have on Friday the newest employment situation numbers. It will be also interesting to see what the Household Survey will teach us about the labor supply and discouraged workers. We'll have to wait and see what comes out and if the recovery in the United States is really on its way to a solid footing or if we'll have to wait a little bit longer.

Besides all that, we'll also have the monthly announcements and comments (forward guidance?) of the Bank of England and the European Central Bank (ECB) and a huge variety of data from all over the world. Once again, we'll have to see them first before we can try to make up our short-term view.

So far, to me it's only the United States of the big economical powers that still has the real potential to continue delivering "better" growth and even surprise on the upside.

In addition, the Young Presidents' Organization (YPO)'s Global Pulse Confidence Index that covers more than 125 countries declined marginally to 60.2 in the second quarter, down from 60.4 in the first quarter and down from 61.3 in the fourth quarter of 2012. The latest number indicates moderate global growth over the next 12 months.

Yes, I'm still wondering where "real good" global growth is finally going to come from. Regarding the eurozone, I want to add it's getting worse more slowly. No, that's not good yet; not by a long shot! Maybe not surprisingly, bank lending in the eurozone remains one of the biggest obstacles to trend growth in the euro area. I'm curious if ECB President Mario Draghi will have something to say about it at the ECB press conference on Thursday.

It's interesting to see that CEO confidence in Asia dropped to a record 17-quarter low, mostly caused by the negative impulse of China and generally weakened confidence in all emerging markets of the region. Only Japan and the other developed economies of the region remained immune to the downturn.

It could also be good to take notice that Latin America (55.5) has now taken over the place of the European Union (55.8) as the least optimistic region in the world, and this for the very first time since 2009.

By the way, the YPO Confidence Index for the BRICs (Brazil, Russia, India and China) has fallen to an all-time low of 57.1. On the contrary, the YPO Confidence Index for the United States rose to 62, which was its best level in a year.

What worries me the most is that China seems clearly to be on its way to slowing down to even below a 6 percent GDP growth during the next couple of years. It is known since the 12th National People's Congress in March this year that the country's new leadership wants household income to grow annually at 6 to 7 percent, and if growth really slows down, it will absolutely be obliged to transfer very significant resources from the state sector to the household sector.

Believe me, that won't be easy to achieve for a ton of (political) reasons! No doubt, much slower growth in China, in case that occurs, which I think it will, would impact negatively global growth in the coming years, the United States included; albeit to a much lower extent than would be the case for most of the developing economies.

No, developing countries as a whole are not back on my preference list as is the case for the eurozone as a whole, where trouble could easily re-emerge in different places with a vengeance once the elections are over in Germany.

I don't think it's a bad idea to also keep in mind that the German national elections are exactly only 54 days away — Sept. 22. The latest polls show practically a "tie" at 45/46 percent between the ruling center-right government coalition and a broad leftist opposition coalition.

For now, at least in my opinion, long-term investors would do well remaining primarily focused on conserving what they have and not on what they could "gain" if everything goes well in the short term.

To me the safest place to be invested remains the United States and U.S. dollar-denominated, top-quality cash equivalent instruments.

I'm not expecting a "quiet" autumn free from highly disruptive volatility outbursts. Yes, I remain convinced the dies have been cast for volatile months ahead and I'd prefer to position myself to be well-protected in case that would happen.

One shouldn't overlook the geopolitical threats/risks that are still out there, such as the situations in Egypt, Syria and Iran.

Finally, and for what it's worth, the Organization for Economic Co-operation and Development (OECD) just announced that annual inflation in all major OECD countries picked up to 1.8 percent year-over-year in June, from 1.6 percent in May. If this is some kind of an "early" canary in the coalmine, only time will be able to tell.

Inflation rose to 1.8 percent in the United States, up from 1.4 percent in May, and to 0.2 percent in Japan, up from negative 0.3 percent the month before, the first positive inflation rate since May 2012.

Outside the OECD area annual inflation increased in China to 2.7 percent in June, up from 2.1 percent in May, and in Brazil up to 6.7 percent, up from 6.5 percent in May.

By the way, my expectations for a broad-based correction in the markets haven't changed at all.

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I'm not expecting a "quiet" autumn free from highly disruptive volatility outbursts. Yes, I remain convinced the dies have been cast for volatile months ahead and I'd prefer to position myself to be well-protected in case that would happen.
Tuesday, 30 July 2013 12:55 PM
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