- The outlook for global growth over the next two years is widely divergent: strong emerging markets; possible rolling recessions in Europe, and slow and steady for the U.S.
- Sovereign debt burdens remain the biggest single risk to global economic activity.
- U.S. economic growth is likely to surprise more on the upside for the third quarter, before returning to our target estimate of between 2.5 and 3.0 percent through 2011.
The synchronous economic growth story that preceded the Great Recession is a thing of the past. While we expect overall global growth will continue to average 4.5 percent annually through 2011, the distribution of economic growth rates is likely to vary greatly.
Solid economic growth in the emerging Asian economies and in the resource-rich Latin America countries will continue to be the catalyst to a 4.5 percent gain in world real GDP growth in 2010 and 2011. China and India are still projected to expand at 10 percent and 9 percent each in 2010, while Brazil is now projected to expand at a 7.5 percent pace, up from our 6 percent estimate earlier this year. Singapore and Taiwan are both expanding at a double digit pace, while Indonesia, Malaysia, Thailand, Argentina and Chile should expand between 6 and 7 percent.
Economists often stress that consumer spending is the driver of economic activity but the consumer we need to focus on is the overseas consumer, especially the expanding middle-class consumer in China and India. On a purchasing parity basis, the developing economies now represent more than 50 percent of world GDP growth. Last year more new cars were sold in China than in the U.S. and in the first half of 2010 General Motors sold more new cars in China than in the U.S.
Despite this good news, the sovereign debt crisis in southern Europe had a major impact in the April to June quarter and today still represents the largest point of uncertainty and risk to global economic activity. Heavy debt burdens in Greece, Portugal, Spain, and Ireland should test the finances of several European countries, as well as the structure of the European Union, European economic activity, European banks that own the sovereign debt and, potentially, the Euro itself. A surge in exports from Germany produced an unsustainable 9 percent increase in German real GDP in 2010:Q2. Although this strength offset the recent weakness in several of the southern European countries, we remain concerned Europe’s economy could be faced with a series of rolling recessions for the next several years. The ECB 2010 bailout package provided a stop-gap measure but it has not solved the wall of debt in Greece, Portugal, Spain, and Ireland. Forced fiscal policy cutbacks will still hinder economic activity in Europe for several years, with the most extreme challenges likely to be centered in continued outright 2 to 4 percent declines in real GDP in the “club-Med” countries.
Real GDP growth should average at least 2.5 to 3.0 percent in 2010:Q4 and 2011, with the greater risk tilted toward stronger growth if the expiring Bush tax cuts are extended and/or replace with offsetting stimulus fiscal measures. The meager 1.7 percent gain in real GDP in 2010:Q2 is likely to be followed by a return towards three percent real growth in the second half of this year, with the possibility of a somewhat stronger temporary bounce back in real GDP growth in 2010:Q3. The source data behind the real GDP reading in 2010:Q2 shows that economic activity was not as weak as the headline print. Final sales to domestic purchasers, a measure of aggregate demand that includes imports but excludes exports, rose 4.4 percent in 2010:Q2. Likewise, real gross domestic purchases—purchases by U.S. residents of goods and services wherever produced—increased 5.2 percent in the 2010:Q2.
Interestingly, over the last 15 months the U.S. industrial sector has moved from one of the weakest links in our economy to a sector that is providing a solid stimulus. During the latter stages of the recession, industrial output in the U.S. was declining at more than a 10 percent annual pace. Today, industrial production is expanding at a six to eight percent pace from year ago levels. This improvement in the factory sector is providing a hidden source to better corporate profits and business reinvestment, as well as an upturn in factory employment and a stabilizing factor to domestic economic activity.
Contrary to the double-dip recession fears, we continue to believe that the sharp moderation in the U.S. economy in 2010:Q2 represents a mid-cycle slowdown or soft spot similar to what unfolded in the 1990’s and early 2000 recoveries. Over the last 100 years, the U.S. economy has experienced just two double dip downturns. The late 2009 and early 2010 surge in nonfarm productivity, combined with a decline in unit labor costs, a rise in corporate profits, the need to replenish depleted inventory positions, and the strong demand for finished consumer products from Asia, should continue to fuel an industrial-led increase in economic activity in the U.S. We have lowered the risk of a “W” or “double dip” in late 2010 or 2011 for the U.S. economy from 15 percent to 10 percent.
Prior to the August 10, 2010 FOMC meeting, the Fed’s balance sheet was anticipated to decline about $700 billion over the next 12 to 18 months, which would have represented quantitative tightening. Instead, the Fed will keep liquidity in the banking system as the Fed substitutes maturing mortgage holdings with Treasuries. This action also puts the Fed in a more liquid position to place additional reserves into the system, if needed, later this year or conversely to drain reserves by selling Treasuries if the economy shows more vibrancy in 2011 or 2012.
On the fiscal side, the run-off of stimulus from the Federal government is likely to be tempered by either the extension of several of the Bush tax cuts and/or the enactment of investment tax credits for businesses. The net result of these events should produce a continuation of the “low and slow” domestic economic recovery, with the risk tilted towards the upside.
Statements concerning Commonfund Group’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Commonfund Group fund. Such statements are also not intended as recommendations by any Commonfund Group entity or employee to the recipient of the presentation. It is Commonfund Group’s policy that investment recommendations to investors must be based on the investment objectives and risk tolerances of each individual investor. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund Group. Commonfund Group disclaims any responsibility to provide the recipient of this presentation with updated or corrected information.