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?
Despite 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 firstname.lastname@example.org and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
"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.
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.
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 ~
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.
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.
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.
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.
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