It has been a tough week for market sentiment. In China, the HSBC Manufacturing PMI remained in contraction territory for the 11th straight time.
In Europe, the prospect of a huge Spanish bailout is slowly becoming a reality. In Japan, the BOJ decided to expand its asset-buying program by another 10 trillion JPY due to weak economic growth.
Sentiment, as a result, has made a complete 180-degree turn. Traders are starting to become risk averse and are retreating to the safety of the Greenback. It’s quite amusing how these things change so fast – just a week ago, market participants couldn’t get enough of higher-yielding currencies because of positive global growth prospects!
The fact of the matter is that there are still some major challenges that the world needs to overcome to achieve true sustainable growth. In this edition of Piponomics, I’m going to discuss the top three hurdles.
European Debt Crisis
In order to fix their finances, many nations in the euro zone have implemented harsh austerity measures. Ironically, instead of helping the debt-troubled nations, these austerity measures have actually resulted in stagnant or sometimes negative GDP growth. After all, government spending is essential to economic growth.
If the euro zone continues on its dark path, it will be forced to turn inward and defensive, dampening global demand. Euro zone’s consumption makes up a big portion of global trade so a move like that could hurt not only its neighboring countries, but other major economies in the world as well.
The second hurdle to sustainable growth is the problem of trade imbalances. This was a hot topic roughly a year ago, but market focus seems to have shifted somewhere else. In any case, I believe this is still a major issue to sustainable global growth. For example, let’s take a look at the trade between the world’s largest economies: the US and China.
If you look at China’s current account balance, you’ll see that it’s huge. Last year, it was at $305 billion dollars, which was higher than 2010’s $297.1 billion. In contrast, the U.S. had a current account deficit of $473 billion for 2011 and $470 billion for 2010.
What this implies is that little has changed with regards to rebalancing. China will continue to be fueled by international trade and domestic government investment, while the U.S. is still overspending.
Little Firepower Left
Two weeks ago, the Federal Reserve and the European Central Bank (ECB) both pulled the trigger on stimulus measures. The Fed announced a new round of quantitative easing while the ECB pledged to buy unlimited amounts of bonds from debt-troubled nations.
Meanwhile, in England, the BOE meeting minutes suggested that the central bank might be setting itself up for a fifth expansion of its asset purchase facility. In Asia, the Bank of Japan (BOJ) expanded its asset-purchase program by another 10 trillion yen while China has added funds to the financial system.
Governments and central banks have poured in a lot of money into their respective economies and it’s only a matter of time until they run out of ammunition and options.
Given how things are moving along, it seems that the world economy is still a long way from returning to sustained growth. The slowdown of 2012 looks set to continue well into next year, and possibly beyond.