Friday, June 15, 2012

Why Are We Slowing Down?

In an article yesterday explaining why I switched from the WSJ to the Financial Times, I cited the FT's far more international orientation as a prime reason for the switch.  With that in mind, consider this point from yesterday's statement from the Bank of Japan regarding interest rate policy:
Regarding risks to the economic outlook, there remains a high degree of uncertainty about the global economy, including the prospects for the European debt problem, the momentum toward recovery for the U.S. economy, and the likelihood of emerging and commodity-exporting economies simultaneously achieving price stability and economic growth. Regarding risks to the price outlook, careful attention should be paid to future developments in international commodity prices and in medium- to long-term inflation expectations.
Put another way, there are no areas of the world economy that are demonstrating a pure growth environment; everybody is dealing with a fairly serious negative environment.  Let's break the world down into geographic blocks:

1.) China is located at the center of Asian economic activity.  Recently, they lowered their lending rate largely as result of weakening internal numbers.  While these numbers still appear strong to a western observer (growth just over 8%), remember that China is trying to help over a billion people become middle class.  To accomplish that goal, the economy needs to have a strong growth rate.  Also consider that the news out of India has become darker over the last few months as well.  A recent set of articles in the Economist highlighted the issues: a political system that is more or less unable to lead, thereby preventing the action on structural roadblocks to growth.   The fact that two of the Asian tigers are slowing is rippling into other regions of the world, which leads to point number 2.

2.) The countries that supply the raw materials to these regions are now slowing.  Australia recently lowered its interest rate by 25 BP in response to the slowing in Asia.  A contributing factor to Brazil's slowdown is the decrease in exports to China.  Other Asian economies that have a trade relationship with China are all experiencing a degree of slowdown, but not recession.  Some of these countries (such as Brazil) were also experiencing strong price increases.  The price increases are are starting to slow, but they are still above comfort levels.

3.) Russia has dropped off the news map of late.  However, it emerged from the recession in far worse shape; it's annual growth rate for the duration of the recovery has been between 3.8% and 5%, which is a full 3% below its growth rate preceding the recession.  This slower rate of growth makes Russia a far less impressive member of the BRIC list. 

4.) The entire European continent is caught up in the debt story -- underneath which we're seeing some terrible economic numbers emerge.  PMIs are now in recession territory, unemployment is increasing and interest rates for less than credit-worthy borrowers are rising.  And, the overall credit situation is casting a pall over the continent, freezing expansion plans. 

5.) The US economy has experienced 2-3 months of declining numbers.  While we're not in recession territory yet, we are clearly in a slowdown with growth probably hovering around the 0% mark.

The EU situation is killing growth in that region.  This is bleeding over to the US from a psychological perspective.  China and India are bleeding over into the Asian region, along with having  a negative impact on countries that export raw materials.

What's missing from the above points?  There is no good news out there; it's all negative.  Every region of the world is experiencing some type of slowdown.   This has a tremendous impact on the overall psychology of market participants, and is a contributing factor to the overall slowing occurring over the globe.