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The global economy exited 2013 in solid shape with growth momentum improving in the U.S. and internationally. Economic data turned more upbeat during the fourth quarter of last year. In fact, the Federal Reserve cited the improving economy as a reason why they should begin to taper its bond-buying program.
But so far in 2014, the economic data has taken a decided turn for the worse — especially in the U.S. and Europe — with renewed weakness in Japan likely to follow soon.
American consumers may not be tapped out, but perhaps they’re hibernating from the Polar Vortex, as U.S. retail spending nose-dived last month. January retail sales declined 0.4 percent — the biggest drop in 10 months — and November’s results were also revised down.
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| Most emerging markets have a fast-growing middle class of consumers to help take up the slack in today’s slow growth world. |
Factory output has also cooled off substantially, as U.S. industrial production declined 0.3 percent in January, when economists had expected a 0.3 percent rise. Manufacturing output dropped 0.8 percent compared with a forecast increase.
This downbeat data tells me the final U.S. gross domestic product (GDP) report for the fourth quarter may not live up to expectations. The initial estimate was a robust 3.2 percent growth rate for the three months ended December, but this figure may be revised lower.
In the graph below you can see how the Citigroup U.S. Economic Surprise Index (top panel) has been carving out a clear downtrend since the beginning of January and is threatening to go sub-zero, which is the dividing line that signals more negative than positive surprises in the economic data.
A similar index for the European Union (EU, middle panel) shows the same deterioration recently from a lower high, since Europe’s economy has barely been expanding in the first place.
The EU economy grew at the anemic rate of just 0.3 percent in the fourth quarter of 2013, which makes its supposed “recovery” pale in comparison to the U.S. Dig deeper into Europe’s sordid economic data, and the picture looks even worse …
* France, with a debt-to-GDP ratio likely to exceed 95 percent this year, is looking more like its troubled PIIGS neighbors every day.
Recently, the French national auditor warned the country would again miss its budget deficit target, which has been the case for the past two years.
* Germany, the export giant of the EU, saw its economy expand just 0.4 percent last quarter, while German consumer prices declined by 0.6 percent — in other words, not growth, but a contraction of two-tenths of one percent.
Not surprising, German investor confidence just fell for a second straight month in February, according to the ZEW Index released Monday.
* Italy, the second-most deeply indebted of the PIIGS with a 127 percent debt-to-GDP ratio (projected to rise this year to 133 percent), is once again engulfed in political turmoil. Italy is getting its fourth government in little more than two years, with Enrico Letta resigning as prime minister after just 10 months on the job.
Italian politics is so fractious and dysfunctional it makes our officials in Washington look like models of productivity by comparison.
With 22 prime ministers since 1980, no Italian government lasts long enough to bring about badly needed and long overdue fiscal and economic reform. So Italy’s economy (accounting for 16.5 percent of total EU output) continues to limp along at stall-speed as the national debt piles up … sound familiar? Italian GDP increased just 0.1 percent in the three months ended December — the first quarterly expansion in over two years!
It’s clear that deflationary pressures and potential crises still have the upper hand in Europe. Japan’s economy also appears to be stalling, with annualized GDP growth of just 1 percent. Not surprisingly, Japan is the worst-performing major stock market this year, down 11.8 percent year to date, after huge gains in 2013.
By comparison, the U.S. economic outlook appears glowing and the relatively mild correction in the S&P 500 is nothing to fret about.
But what’s most interesting about the chart above is the remarkable recovery in the developing economies. The Citigroup Emerging Markets Economic Surprise Index bottomed in mid-2013. And despite a minor dip near year-end, it has been soaring higher in recent months.
Just six months ago the index was minus 12.1, meaning more negative than positive economic data surprises. Now, the Emerging Market gauge has soared to plus 20.2, far ahead of the U.S., Europe and Japan.
The hard evidence in the data contradicts the notion that emerging markets are suffering an “economic crisis.”
If anything, it’s the over-indebted developed economies (especially Europe and Japan) that seem to be locked into perpetual economic crisis.
Don’t get me wrong, developing nations certainly feel the pinch in today’s slow growth world when their best customers in the U.S. and Europe aren’t buying as much on credit. But most emerging markets also have a faster-growing middle class of consumers to help take up the slack.
The so-called Fragile-Five (Brazil, India, Indonesia, South Africa, and Turkey) and other emerging economies that run chronic current-account deficits may be at risk due to a liquidity crunch.
But many other emerging markets are performing very well economically, and that’s reflected in their stock markets, which continue to outperform the S&P 500 Index year-to-date.
Good investing,
Mike Burnick
Mike Burnick, with 30 years of professional investment experience, is the Executive Director for The Edelson Institute, where he is the editor of Real Wealth Report, Gold Mining Millionaire, and E-Wave Trader. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also served as Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.