WEEKLY COMMENT 16-10-2014
By Barry Edwards
The Faltering World Economy
The recent adjustment in stock markets around the world has unnerved investors who are now looking more closely at the real economic problems that Europe and developing countries are experiencing. While the markets were at record highs this did not seem to bother most investors who were happy to believe that the world economies would recover and start growing again during 2015. The announcement that the USA retail figures did not grow as expected seems to be the reason for this sudden change of heart.
To be fair, concerns were also arising about the Ebola epidemic and the possibility that China could suffer from a serious downtown. Many financial commentators were forecasting a market correction soon mainly because rising markets usually have adjustments on their path upwards. Whatever the reasons for this sell off, it is clear the realities of the problems around the world, which were ignored while markets were rising, have been recognised as forewarnings ahead.
There is very good reason to be concerned about the economies of the world and what the outlook tells us for the next few years ahead. However, when looking from the perspective of the USA and the UK, recovery seems well underway with the potential for growth to continue for some time into the future. The IMF has forecast a slowdown in the growth for both these economies over the next year and has been expressing concern about developing countries. Despite these predictions the real problem is Europe and especially the Eurozone which is now looking like it will actually go into recession when the next quarterly figures are announced.
There are various other events and movement in the price of commodities that are compounding the pessimistic view that has overtaken market opinion as stock markets have declined. These are mainly, Ukraine, the Middle East, the fall in the price of oil and commodities generally. The fact that commodity prices are declining is a clear indication that the world economy is shrinking rather than expanding. One of the reasons for this is China and many commentators have been expecting serious problems to deflate its growth for some time but it seems the authorities are managing to control the economy and prevent it being blown off course for the time being.
Investors have to decide what they think will happen to the world economy when they manage savings for everyone and they have not been selling in large amounts. It seems that most of the downward movement has been caused by short term trading which will be closed out providing a firmer base to markets. My own discussions with fund managers suggest they look at this correction as an opportunity to buy, especially in Europe. Therefore, the underlying opinion is fairly positive over the next few years which is the timeframe they consider for making investments.
Whether this view continues is anyone’s guess and if any of the events mentioned above take a new negative course, this will change opinion quickly. My own view is that world growth will resume but much more gradually than many believe, whatever happens in China. The USA and the UK will see slower but positive growth making the restoration of government finances more difficult and prolonged.
Globalisation has brought the world economies much closer together making many countries dependent on supplying others for the growth they have experienced over the years. When these arrangements change and demand for the commodities or products reduce, developing alternatives to maintain growth is not straightforward. Many countries are undergoing this process which is altering the makeup of world trade creating the faltering economies we are now seeing.
A transformation that has taken place as globalisation has involved many more people in the real economies of their countries creating demand for products that previously were only available to the better off. These people have got used to the larger incomes they have been receiving and have become similar to many developed countries in the lifestyle they aspire to experience. This also means their governments have become genuinely more responsible in providing the public services that these people now demand and have to manage their economies more professionally.
Understanding that we are now much more reliant on each other worldwide is the real concept that many people are just beginning to grasp. It means that we have to take into account what is happening in other parts of the world and cooperate to improve and change things for the better. Individuals seem to be prepared to accept this new approach more willingly than their governments would appear to be, creating a clear disconnection between people and their leaders.
Now many more people are benefitting from the new world economy, they are in a position to influence how events unfold with the modern communications technology that has become universal. The problem is that people have not yet learnt how to use this power and for the moment the status quo prevails. In time, the world economy will be more responsive to the wishes of people which will probably mean that growth will be slower but more stable as the world progresses, which is good for investors everywhere.
That’s all for this week, more observations next week.