A Sobering Assessment of Growth Prospects
A sobering assessment of growth prospects in the developed world from Carl Weinberg, High Frequency Economics. I think over the course of the two hours we spent with Carl this morning we failed to elicit from him very many positive thoughts on the growth outlook for the US, Euro zone and Japan.
On the US - Income growth is not enough alone to support spending. Carl worries about housing.
On Japan – Contraction of the economy remains the likely scenario this year with leading indicators failing to support optimism about the recovery.
On the Eurozone – expect unimpressive growth in Germany and France. I love this line so I will repeat it verbatim from Carl’s report on France..... ‘Fiscal policy is subtracting from GDP growth as the economy is faltering. Is this not the worst demonstration of fiscal policy as a tool for managing the economic cycle you have ever seen? Don’t let the children see this!’
But don’t fall in to the trap of reading that as negative for markets. In fact Carl thinks government bonds will get a bump – yields in Japan, Europe and the US are too high he says as analysts/investors are too optimistic about growth prospects. This doesn’t have to be negative for equities; companies will continue to reap better profits from the inability of labour to lift wage rates. And, while Carl is a long term bull on the secular commodity story, near to medium term commodity input prices will ease...again supporting better corporate profits. The history of markets shows there is a tenuous relationship between economic performance and stock prices, this is another one of those times it would seem (if you believe Carl) when stocks can rise and economies sputter.
I was very interested in the markets failure to predict the BoE rate hike. The market is very focussed on the interest rate story; sometimes it seems to the exclusion of other drivers. So why did Reuters poll of 50 economists only throw up one vote for a rate hike? I read this as a good news story for the retail investor; it is a very clear demonstration of how you can beat the experts by rejecting the consensus and exploring alternate views.
Have a great weekend everybody.