Global economic prospects strong, yet equity markets stall

The global economy continues to expand and growth is likely to be strong over the short-term.  Economic policy is still expansionary in most major economies, corporate cashflows are strong, activity continues to be boosted by the turn in the inventory cycle and the world trade multiplier is working on the upside.  The IMF recently raised its global growth forecast for 2010 to 4.6% which, after growth of 3% in 2008 and a contraction of 0.6% in 2009, would represent the biggest global economic expansion since 2007.  
 

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General Trend:    Worsening      Neutral     Improving
Note: Chinese GDP YOY

However, at the forefront of investors’ minds are concerns about the medium-term economic outlook, which have been reflected in the weak and volatile performance of global equities in recent weeks.  Growth in most developed economies is now expected to be below trend in 2011, and projections are being revised down to reflect the end of bail-out packages, the introduction of austerity measures in Europe, further household retrenchment and weak labour markets.  In the United States, a recent string of weaker-than-anticipated reports on employment, confidence and housing have raised concerns about another economic downturn, although fears of a potential ‘double-dip’ appear to be overblown.  


Divergence in policy and growth prospects paints uneven trajectory

By contrast, developing economies are showing classic V-shape recoveries with Latin America emerging as a global growth driver and Asia’s economies continuing to expand strongly. There is mounting evidence that the Chinese economy is now going through ‘managed’ deceleration - its GDP expanded annually by 10.3% in Q2 (compared with 11.9% in Q1), its manufacturing PMI has slowed in recent months, and efforts to curb price escalation are bearing fruit, with national property prices falling by 0.1% in June, marking the first decline since early 2009.

The G8/G20 summits in June have brought divergent views into focus between Europe, where austerity measures are now being implemented, and the United States, which is still pursuing expansionary policies with lingering concerns about the early withdrawal of stimulus packages.  Differences in policy direction between the US and Europe, together with differential growth rates between developed and developing economies, point to an increasingly uneven trajectory for the global economy over the medium-term.

Global Market Perspective - global economy