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By HaleStewart February 28, 2016 7:22 am
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International Economic Week in Review: More Growth Warnings, Edition

     This was a light week of news.  But, there were two major developments: the G20 urged its members to coordinate a global stimulus plan:

The Group of 20 nations must plan now for a coordinated stimulus program to keep a slowing global economy from stalling, International Monetary Fund staff said in a report on Wednesday.

The report was prepared for senior G20 officials who are meeting in Shanghai later this week amid falling equity markets, volatile currencies and signs of economic weakness throughout the world.

"The G20 must plan now for coordinated demand support using available fiscal space to boost public investment," IMF staff said in the report.

This, of course, won’t happen.   But it’s an acknowledgment that there are potential issues with the global economy.  Additionally, Citigroup issued a warning regarding global growth:

The growing threat to the global outlook rests on poor fundamentals, which include the pre-existing fragilities related to the structural and cyclical slowdowns in China and its unsustainable currency regime, broken EM growth models, excessive leverage across many countries and sectors, and rising regional risks (Brexit) and geopolitical risks (including in Russia, Turkey and Syria, the South China Sea, and North Korea).

These fundamental concerns are aggravated by a crisis of confidence that is in part fuelled by a growing worry that, should conditions deteriorate, they may not elicit an effective policy response. The main ‘game changers’ in our view are the emerging belief that even the US economy is no longer bullet-proof and that policymakers (in the US and elsewhere) may not be there to come to the rescue of their own economies, let alone the world economy, by propping up asset prices and aggregate demand. It is likely, in our view, that global growth will this year once again underperform (against long-term trends and previous year forecasts). Citi’s latest forecasts are for global growth of 2.5% in 2016 (based on market exchange rates and official statistics) and around 2.2% (adjusted for probable Chinese mismeasurement). But in our view, the risk of a global growth recession (growth below 2%) is high and rising.

Neither development should be considered as out of the mainstream in the current environment.  What is important to note is no one is offering a counter-argument; there are no reports that see stronger global growth over the next 12-24 months. The lack of an opposing view is ultimately what should concern investors.

     EU news was mixed.  The Markit manufacturing flash readings for manufacturing and services were 51 and 53, respectively.  However, new domestic and export orders declined and sentiment deteriorated sharply.  Loan growth continues to grow: household loans increased 1.4% while non-financial loans were up .6%.  As the following graphic shows, these numbers continue to move into positive territory:

Finally, inflation was up a disappointing .3% Y/Y.  This data point continues to print just about the “0” level:

     The only news from the UK was the second 4Q15 GDP estimate, which was a .5% increase.  However, consumer demand was the primary reason for the increase.  In fact, it's been the primary reason for growth the last two quarters, as these two charts show:

  

The top chart shows household consumption, which has performed consistently since 2013. In contast, the bottom chart shows domestic investment, which has been weak in three of the last five quarters.

     Japanese news was bearish.  The worst news was the -.4% M/M drop in CPI; the Y/Y number was also a concerning 0%.  Even the .7% Y/Y increase in the core rate showed the BOJ has failed to meaningfully dent deflationary pressures.  The 1 point drop in the LEIs (to 110.9) and 1.1 point decline in the CEIs (to 102.1) added to the gloom.  And the manufacturing sector is barely expanding, with a 50.3 reading from the Markit survey. For an economy that desperately needs to establish forward momentum, the Japanese economy is failing.         

 

 

 

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