Rich world heads into recession

For the first time in 4 years, GDP growth in the 7 largest economies actually shrank. Will the decline continue?

By Anthony Mirhaydari Feb 14, 2013 3:27PM

Eiffel Tower copyright Dave and Les Jacobs, Blend Images, Getty ImagesDespite the stock market's historic resistance to any significant pullbacks, the global economy has started to fall out of the sky. For the first time since 2009, according to preliminary data from six of the world's seven largest economies, GDP growth dropped into negative territory. And for France, Japan, the United Kingdom, and Italy, they economies are starting to shrink before they were able to surpass their pre-crisis highs.

 

The causes are many. Fiscal austerity. Lost consumer confidence. Weak export demand. Political uncertainty. And for the one country that hasn't reported yet (Canada), prospects are gloomy as its long property bubble is finally starting to burst.

 

And by all indications, the decline is set to continue.

 

Japan reported its third consecutive quarterly decline in GDP growth (-0.1%) due to a drop in business investment, exports, and inventories.

 

But the most shocking datapoint was the surprise -0.6% quarter-over-quarter drop in eurozone GDP growth as both France (-0.3%) and Germany (-0.6%) suffered declines in output. Italy was also particularly weak (-0.9%).

 

 

As with the recent -0.1% Q4 GDP report here at home, the optimists are trying to write off the decline as a one-time outlier. They point to a value-added tax increase in Spain at the start of September. They point to poor weather in December which dampened construction activity, especially in Germany.

 

But there are also signs that the drop in Eurozone activity is deeper and more structural as the woes that have been pushing youth unemployment towards 60% in Spain and Greece spread to the core of the eurozone.

 

 

The industrial, export-oriented beating hearts of the currency union -- the countries that are expected to provide the bailout cash to the likes of Greece and Portugal as they try to recover -- succumbed to weakness and recorded significant falls in GDP growth including the Netherlands (-0.2%), Austria (-0.2%), and Finland (-0.5%).

 

France was the only country to break down the GDP data, and a look at the details suggests this is just start of what could be a deepening decline. Investment by non-financial businesses fell -1.2% and housing investment fell -0.8%. Execuatives clearly see storm clouds on the horizon.

 

 

And for good reason: The scary thing about a drop in the European economy is that it worsens debt-to-GDP and deficit-to-GDP calculations at the center of the regions debt crisis. Already, both France and Spain look like they are going to miss previous deficit targets, requiring either more taxes, less spending, or leniency from the austerity taskmasters in Germany.

 

The decline wasn't limited to eurozone countries, with emerging European economies suffering as well after suffering sharp drops in export-oriented sectors like manufacturing.

 

This also sets the stage for political turbulence with Italians headed to the polls later this month, which could see the return of anti-austerity conservative firebrand Silvio Berlusconi. Germans will go to the polls later this year. And Spain's ruling party remains embroiled in an ongoing illegal kickback scandal.

 

The bulls believe the U.S. economy can bounce back since much of the recent weakness was caused by government spending cuts, which were offset by higher consumer spending late last year. Unfortunately, with the budget sequester all but certain (which will lop 0.7% off of GDP growth this year) and another budget/debt ceiling fight looming, more spending cuts and more tax hikes are coming. Consumers are already recoiling from the January 1 payroll tax hike -- and are also contending with record high gas prices for this time of year.

 

Both aren't exactly conducive to big ticket spending.

 

Moreover, the folks at Capital Economics believe the Eurozone economy will shrink by 2% in 2013, with substantial weakness in Italy and Spain.

 

Given the dynamics of this downturn -- driven by tapped out government balance sheets -- it's unlikely the Wall Street optimists will get the quick turnaround they expect. Once economists are forced to mark down their 2013 GDP growth estimates, sentiment (which has reached bubbly extremes) and stock prices (which haven't had a correction since November) will surely follow.   

 

 

No wonder that defensive, safe haven assets like U.S. Treasury bonds and the U.S. dollar, which had been left out in the cold during the run up to Dow 14,000, are perking up today. I'm adding both the US Dollar Bullish Index Fund (UUP) and the Direxion 3x Treasury Bull (TMF) to my Edge Letter Sample Portfolio.

 

If you've been riding stocks higher, with the fundamentals turning south like they are now and sentiment at such extreme levels, now's the time to consider stepping off and booking profits.

 

Be sure to check out Anthony's new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at anthony@edgeletter.c​om and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.

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75Comments
Feb 14, 2013 3:55PM
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A legendary hedge fund/value investor put it succinctly:

"The short-term palliatives we are currently pursuing go against everything a long-term-oriented society should aspire to achieve. Today's policies encourage spending over savings, reward the profligate over the prudent, and support the failing at the expense of the successful. The antidote now being dispensed puts us squarely in uncharted territory in which the risks are outside the range of historical experience...

The distortions in the markets are the result of the deliberate manipulation of currency values around the world by central bankers. The central bankers are responding to their political masters' demands for easier money and cheaper credit. There is now, around the world, a widespread belief that the symbol of wealth (paper money) alone can deliver all the benefits of the market."


These are extremely treacherous times in which we live.

Feb 14, 2013 6:07PM
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Anthony, you must have missed the presidents state of the union speech. Everything is good, strong, and heading to prosperity. Additional spending on green energy, education, and infrastructure will propel the economy into great growth.

Since most of the spending is borrowed and we are ,according to the president, reducing the defecit over 10 years, and revenues are increasing through TAXES, I am still trying to figure out how this is going to work. Oh i know, its the additional tax revenue from min wage being increased to $9/hr.

All this is laughable on the part of the admin to convince people we are headed in the right direction-they must be on a Carnival Cruise. 

Feb 14, 2013 5:49PM
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all the countries mentioned in the article have huge Nanny states....they have raised taxes that most people try to move away from them. they have no or little re-investment into their economies. If they try to cut spending they have riots. Looks to me that the CHICKENS have COME HOME TO ROOST. That is where the USA is heading if we don't get things under control
Feb 14, 2013 6:30PM
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The US and Europe have been printing money like crazy and, still, their GDPs are shrinking. That´s obviously because savers are getting no compensation for their hard work. All we see is this formation of bubbles in speculative markets. In the end, stagflation is what lies ahead.
Feb 14, 2013 5:55PM
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No amount of negative news either here in the USA or abroad will derail this stock market as long as those in control are still "pushing the buttons".  By all rights this market should be below 10,000l.
Feb 14, 2013 7:49PM
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the market is no longer an economic barometer
Feb 14, 2013 8:34PM
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Bimmers, Audi's & Caddies In The Parking Lot,

As a semi retired guy on a tight budget, I frequent the 99 Cent and Dollar Stores a couple times a week for general household supplies etc. I've always taken notice of the types of cars in the parking lot, and in the past year or so the usual cluster of old cars and clunkers has been added to by an increasing number of upper eschelon vehicles that were never seen there before. Those nice new cars may indeed be a visible barometer of the real economy and the continually contracting spending habits of the middle, (and upper middle) class. It's just a local observation but it may be one of the harbingers of economic events to come...and I'm afraid few of them will be positive.

Peace to all ~

Feb 14, 2013 6:27PM
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This afternoon the market showed its resiliency; what appeared to be a down day turned into a not so bad one....We take it any time....Again, we are so glad these markets are not correlated to the economy. it would be a disaster....Now, remember, people are making less money, being taxed more. it will catch up sooner or later, more sooner than later to be truthful so, be cautious, the future not as rosy as we'd like.
Feb 14, 2013 5:45PM
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Time to buy gold and silver plus the miners.  Funny he did not mention that.  Get ready to pay more for everything including energy.  Oil stocks are still doing well.  Congress is not going to help us get out of debt or reduce spending.  We are on our own folks, interest rates are going to go up.  Be ready for the worst.  Be happy if nothing happens!
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Let's see -- Japan, Europe and the U.S. all gave up their main street jobs that built wealth to third world countries like China. China is building wealth by building material things of real value.

 

The US , Japan and Europe are merely trying to keep the 1 percent in major money by printing an infinite amount of monies to keep the 1 percenters super rich while allowing their 99 percenters to fall into proverty with no wealth and means of improving their life and basically falling into third or even fourth world standards.

 

Yep the decline of the western world has been written in stone now and there is nothing short of kicking the super rich out of the west and harvesting the raw materials of the western lands and once again build wealth by just building things.

 

Gee people the fall of the US and Japan and Europe is going to happen and happen soon. None of those countries are makign enough wealth to pay off their debt. We are going to have crisis soon the likes of which no one has seen before.

 

Even the great USA which use to feed the world has now made farming in America so expensive that no new farmers can buy farm land for the $100 an acre needed in order to produce food at a profit. So as the old farmers retire or just quit there are no replacements.

 

Already 40 percent of the USA food is imported. So when we collapse at least 40 percent of our population will simply strave to death. By the time we collapse the percentage of imported food will probably be at 50 percent.

 

The rest of the population are going to be at each other's thoarts for mere surival.

 

The collapse will not be a soft landing nor will it be a hard landing it will be a total destruction the likes of which the old USSR had always had planned for US.

 

 

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Mirage Guy:  You probably meant to say that a Democrat was in the Presidency during the times of these wars.  Whether or not they wanted to start them is most likely hard to determine.  Because the Presidents at one time had to get permission to go to war, all of Congress had to vote on it.    Unlke what is happening today with Executive Orders and 60 day allowance periods.

Feb 14, 2013 6:19PM
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I have a  question if anyone would like to answer. In this global economy right now what is it that an individual can possess that has real value?? Is it skills, knowledge, health ,family,influential powerful friends in high places material wealth or is the changing economic social and environmental state of the world changing even the things we thought had value?????  With the speed ,instability and fragility of our society is it really more  insidiously treacherous than ever before???Is ruthlessness and greed winning out over more altruistic and caring qualities in humans and as our population grows are we becoming more or less caring as human beings?
Feb 14, 2013 11:11PM
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 Anthony, you say rich countries are headed toward recession.  What countries are rich?  Tell me one country on your list that is not in the red.  Rich means you have money in the bank (savings).  I can't think of one country on your list that is in the black (savings).  Every country is robbing Peter to pay Paul.  


http://finance.yahoo.com/news/dying-dollar-why-us-currency-213606781.html

This is not looking good.
Feb 14, 2013 10:03PM
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If Q1 GDP contracts and we officially enter a double dip, the question really becomes what the response will be, both fiscal and monetary.  Will Bernanke double his efforts and inject $170 billion per month into the economy?   Will we see another "stimulus" plan?  A double dip is bad enough, but when the powers that be use that opportunity to expand gov and devalue the dollar even further, it makes it 100 times worse.
Feb 14, 2013 9:30PM
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Money printing will never work. There is no end game to it. At least you'd think maybe the banks and the fed will all go down with the ship too. More realistically, they'll jump into their waiting lifeboats as we go down.

Feb 14, 2013 10:13PM
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Japan's printing money "hand over fist" just to lower the value of their currency. Portugal, Italy , Spain, Ireland and Greece are borrowing money from E.C.B just to cover their a$$. China's exports are dropping and manufacturing is slowing. World food prices are sky rocketing and gas prices are increasing steadily. Spring is here! All we need now is a drought. 
In the next few weeks you will see the markets react to all this turmoil.

Feb 15, 2013 8:45AM
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Anthony

 

Seems you don't have so many doubters and hecklers on this article.

 

Obozo's State of the Union included more than a few lies.

 

I think I'll go sell a some more stocks and buy some more Jr Minors.

 

Yea, Todd, I like that: "Its Bushes Fault"! Obozo wil blame Bush to the bitter end.

Feb 14, 2013 10:58PM
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A analyst on CNBC said it correctly. As long as Bernanke continues to flood the market with currency via Q this and that, the market will thrive. Once that stops, the market stops with it. When this bubble bursts, I'll shut my accounts down in about a 1/2 hour. 
Feb 15, 2013 11:09AM
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I remember a few centuries ago.  When one neighbor has an extra gallon of mike and another neighbor has an extra bale of hays, they traded.  Another neighbor has an extra dozen of eggs and another has extra goat cheese and they traded.  Life wasn't too complicated then.  Do I missed it.
Feb 14, 2013 10:40PM
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gee ! i wonder if the complicity of wallstreet n the world banks, with the worlds biggest  heist , has anything to do with this ?
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[BRIEFING.COM] The stock market finished the Tuesday session on the defensive after spending the entire day in a steady retreat. The S&P 500 (-0.6%) posted its third consecutive decline, while the small-cap Russell 2000 (-0.9%) slipped behind the broader market during afternoon action.

Equity indices were pressured from the start following some overnight developments that weighed on sentiment. The market tried to overcome the early weakness, but could not stage a sustained rebound, ... More


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