Macro Outlook: February 2014

A (very brief) snapshot of Europe, Asia and the US

A rapid summation of how some economies are performing.

Global Macro as of February 25, 2014

Europe struggles to gain traction as growth is mixed

The story of Europe is no doubt a complicated one; one colored by both political unrest and economic stagnation. For the past couple of years, Europe has been ailing, as bad debts and high unemployment figures exacerbate the weak economic conditions. However, there is cause for hope. In the third quarter, Spain exited its two-year recession thanks to stronger export data. What’s more, Spain is finally seeing increases in consumption growth and private investment after 3 years of decline, and its credit levels are stabilizing. Even so, unemployment remains high at 25% and we must ask ourselves what Spain’s future growth will be as the government attempts to deleverage.

Italy is another country to consider. The 3rd largest economy in the Eurozone (after Germany and France), Italy faces considerable problems moving forward. Unemployment remains high, at 12.7% in December, and although it isn’t as bad as that of Greece or that of Spain, the rate is still above Eurozone averages. Italy is also contending with large government debts; the IMF estimates that the Italian government’s gross debt is more than 130% of GDP. Sluggish growth worsens the issue, and despite decent growth in the luxury goods market, the future of Italy (for now) looks rather bleak.

On the bright side, Germany seems to be doing well (as economists expect it should). Business morale this February reached its highest point since July 2011, which suggests to some that the EU could growth faster in the first quarter after modest growth in 2013. Even so, France’s growth is tepid at best, as private consumption continues to be small. In the UK, the outlook is more positive, as domestic demand is projected to increase.

Some good news in the East

Asian markets seem to be faring better than their European counterparts. While the Chinese government is projecting decreased growth for the economy as global demand slows, the country is still expected to see impressive growth, at around 7.5%. Asian stocks are down from their high in 2nd quarter of 2013, with Thailand seeing the largest drops due to political instability that has been leading to massive outflows from foreign investors. The outlook for Asia is improving though, as prospects for India and Indonesia (two major economies within Asia) see their economies improve. India’s central bank continues to raise rates, and such moves has bolstered confidence amongst investors as the bank attempts to curb inflation. In Vietnam, inflation has remained low (comparatively) and economists expecting a 5.8% GDP growth in 2014. In the Philippines, despite the Typhoon Haiyan in the fourth quarter of 2013, the country has recovered well and is on track to meet their GDP estimates. Finally, Taiwan saw impressive 4th quarter GDP data, leading some to estimate a .3% growth in GDP, from 2.9% to 3.2%.

Caution is encouraged as the US chugs along

There’s a lot to be said about the United States Economy. The country’s debt to GDP ratio is still high, with no concrete plans or policies on how to mitigate the debt. The debt ceiling crisis that some were expecting to be the focus-piece of the media in early 2014 was pushed back thanks to President Obama’s move to ban filibustering. The unemployment rate, currently at 6.6%, is expected to lower as the economy improves. Recent data for 2013 places US GDP at 3.2%, which is impressive (and to some, expected) growth.

Looking at the business sector, there is cause for celebration. Consumer confidence is on the rise from lower levels in the 3rd quarter of last year. Discretionary spending is projected to increase, due to huge wealth gains generated in the last year by the stock market. As outlook continues to be negative for emerging economies and uncertainty remains in the Eurozone, more investors are turning to the United States for investment opportunities. Manufacturing appears to be on the rise, and the recent movements in the tech. sector has been the talk of many.

That said, it is important to remain cautious. The Fed’s tapering, so far, has had little effect on markets. History has shown, though, that as QE ends, the stock market tends to fall. With the markets up over 29% last year, those seeking to invest in 2014 ought to be particularly careful about their investments, as a concentration of wealth could have serious ramifications on the US. The average bull market, according to historical data, lasts approximately 3.8 years. The US is currently on its 5th year riding the bull, with little indication as to when this growth will ebb.