Home' Trinidad and Tobago Guardian : February 13th 2014 Contents BG24 | ECONOMIST
BUSINESS GUARDIAN www.guardian.co.tt FEBRUARY 2014 • WEEK TWO
For much of 2013 the world's big
stock markets had a magical
quality about them. They soared
upward -- America's S&P 500
index rose by 30 per cent last
year and Japan's Nikkei by 57 per cent --
buoyed by monetary stimulus and growing
optimism about global growth.
In the past month the magic has worn off
abruptly. More than US$3 trillion has been
wiped off global share prices since the start
of January. The S&P 500 is down by almost
five per cent, the Nikkei by 14 per cent and
the MSCI emerging-market index by almost
nine per ent.
That investors should lock in some profits
after such a remarkable surge is hardly sur-
prising. American share prices, in particular,
were beginning to look too high. The S&P
finished 2013 at a multiple of 25 times ten-
year earnings, well above the historical average
A few recent bits of poor economic news
are scarcely grounds for panic. It is hard to
see a compelling economic reason why one
unexpectedly weak report on American man-
ufacturing, for instance, should push Japan's
Nikkei down by more than four cent in a day.
It's far easier to explain the market gyrations
as a necessary correction.
Prices always jump around, but in the end
they are determined by the underlying econ-
omy. Here it would be a mistake to be too
sanguine. Economists are notoriously bad at
predicting sudden turning points in global
growth. Even if it goes no further, the dip in
asset prices has hurt this year's growth
prospects, particularly in emerging markets,
where credit conditions are tighter and foreign
capital less abundant. Tellingly, commodity
prices also are slipping: The price of iron ore
fell by more than eight per cent in January.
On balance, however, the evidence to date
suggests that investors' gloom is overdone.
A handful of disappointing numbers does
not mean that America's underlying recovery
is stalling. China's economy is slowing, but
the odds of a sudden slump remain low.
Although other emerging markets indeed will
grow more slowly in 2014, they are not head-
ing for a broad collapse, and the odds are
rising that monetary policy in both Europe
and Japan is about to be eased further.
Global growth still will probably exceed
last year's pace of three per cent, on a pur-
chasing-power parity basis. For now, in short,
this looks more like a wobble than a tum-
ble.The outlook for America's economy is by
far the most important reason for this view.
Since the United States is driving the global
recovery, sustained weakness there would
mean that prospects for the world economy
were grim. That does not seem likely, however.
January's spate of feeble statistics, from weak
manufacturing orders to low car sales, can
be explained in part by the weather. America
has had an unusually bitter winter, with pun-
ishing snowfall and frigid temperatures, which
has disrupted economic activity.
This suggests that all the figures for January,
including the all-important employment fig-
ures, which are due to be released on Feb. 7,
should be taken with a truckload of salt.
That is all the more so because there is no
reason to expect a sudden spending slump.
The balance sheets of American households
are strong. The stock-market slide has dented
consumer confidence, but investors' flight
from risk has pushed down yields on Treasury
bonds, which in turn should lower mortgage
rates. Fiscal policy is far less of a drag than
it was in 2013.
All this still points to solid, above-trend
growth of around 3 percent in 2014. One rea-
son this may not excite investors is that it
no longer implies an acceleration. America's
economy was roaring along at a 3.2-per cent
pace at the end of 2013. The first few months
of 2014 will be weaker than that, even though
average growth for 2014 still looks likely to
outpace last year's rate of 1.9 per cent.
China's economy, for its part, is clearly
slowing. The latest purchasing managers'
index suggests that factory activity is at a
six-month low. The question is how far and
how fast that slowdown will go.
Many investors fear a ''hard landing.'' Their
logic is that China has reached the limits of
a debt-fueled, investment-led growth model,
and that this kind of growth does not merely
slow but ends in a financial bust. Hence the
jitters on news that a shadow-bank product
had to be bailed out.
It remains more likely, however, that China's
growth is slowing rather than slumping. The
government has the capacity to prevent a
rout, and the recent bailout suggests that it
is willing to use it.
If fears about a hard landing in China are
exaggerated, then so are worries about a broad
emerging-market collapse. That is because
the pace of Chinese growth has a big direct
impact on emerging economies as a whole.
Expectations for Chinese growth also will be
a big influence on the desire of foreigners to
flee other emerging markets, and hence on
how much financial conditions in these coun-
tries tighten. After more than doubling interest
rates, Turkey's economy will be lucky to grow
by 2 per cent in 2014, compared with almost
four per cent in 2013. In most places, however,
less draconian rate hikes will merely dampen
a hoped-for acceleration in growth rather
than prompt a rout.
The final, paradoxical, reason for guarded
optimism is that the market jitters make bold-
er monetary action more likely in Europe and
Japan. With inflation in the euro area running
at a worryingly low 0.8 per cent, the European
Central Bank, which met on February 6 after
this article went to press, needs to do more
to loosen monetary conditions. Really bold
action, such as buying bundles of bank loans,
is more likely when financial markets are in
a funk. That logic is even stronger in Japan,
whose stock market has fallen furthest and
whose economy will be hit by a sharp rise
in the consumption tax on April 1. So more
easing is in the cards.
If this analysis is correct, the current market
pessimism could prove temporary. Investors
should recover their nerve as they realize that
the bottom is not falling out of the world
Our prognosis is much better than the out-
come markets now fear, but it would not be
much to get excited about. The global recovery
will be far from healthy, too reliant on Amer-
ica, still at risk from China and still dependent
on the prop of easy monetary policy.
In other words, still awfully wobbly.
The worldwide wobble
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