I have been writing about the troubled eurozone economies and have questioned their ability to help stop their respective nations from crumbling.
There is growing evidence now of a widespread economic slowdown in the eurozone, something we started predicting in Profit Confidential in January of this year. I see the economic picture in Europe getting deeper and darker.
We all know that Greece’s economy has been in recession for sometime and shows no signs of economic growth. In addition, Spain, Italy and Portugal’s economies are in recession, so no economic growth there either.
On August 14, Eurostat data showed that the eurozone economy contracted by 0.2% in the second quarter of this year. The economic slowdown in Spain, Italy and Portugal was -0.4%, -0.7%, and -1.2%, respectively. The data also showed that Germany’s economy grew only by 0.3% in the second quarter. Austria and the Netherlands grew by only 0.2% each. The economy of Finland, which has an AAA credit rating, contracted by 1.0%.
Some suggest Germany is a strong country and should be able to avert the eurozone debt crisis by itself. Those people need to think again. Germany is facing troubles and witnessing its own economic slowdown. The labor market in Germany is bleak. Business confidence in Germany fell to a two-year low in July due to economic slowdowns and recessions in the neighboring countries. (Source: Bloomberg, July 31, 2012.)
Germany exports 40% of all its trade to eurozone countries. If the economies in the eurozone countries are suffering, the effect will trickle down to Germany. To give credence to my forecast, just look at Daimler AG. The world’s third largest maker of luxury vehicles reported a 13% declined in profits in the second quarter. Volkswagen reported that the impact of debt crises in eurozone is weighing on its product demand in the home region.
Here’s another interesting observation that should be noted. Before, it was the southern eurozone countries that were showing signs of economic slowdown or were in recession. Now there is evidence that the northern eurozone countries like Finland and the Netherlands are facing an economic slowdown as well.
The latest economic data confirm our beginning of the year forecast that the economic slowdown in the eurozone economy will lead them into another recession. This will not only make it difficult for the eurozone economies that are already in high debt levels, but also for nations like Germany.
The eurozone debt crisis is causing an economic slowdown in other parts of the worlds as well. Taiwan’s economy contracted in the second quarter unexpectedly. South Korea’s output fell in the second quarter and Japanese manufacturing fell to the lowest level since 2011. (Source: Bloomberg, July 31, 2012.)
As I have been writing, China, the eurozone’s biggest trading partner, is seeing its own economic slowdown. (See: “Chinese Economy Shows Signs of Severe Slowdown.”) This is very worrisome, as China plays a huge role in the global economy and any economic slowdown in the Chinese economy will have an immediate effect on the U.S. economy.
The current estimated growth in gross domestic product (GDP) for the U.S is 2.2% for 2012. At this point, it is very unlikely that U.S. GDP will grow at that rate. The effect of the economic slowdown in China is already being felt here in the U.S. More and more American corporations are providing negative outlooks and profit growth is falling rapidly.
The issues at hand, such as high unemployment, prove that economic growth is stagnant and also illustrate that the contracting global economy is creating a negative spillover effect on the U.S. If there are signs of economic growth, I can’t see them.
Where the Market Stands; Where it’s Headed:
The Dow Jones Industrial Average tried yesterday to break to a new post-credit-crisis high, but failed. Maybe it’s the slowing world economy. Maybe investors are finally cluing in that the recent stock market rally has been accompanied by very light volume (usually an indicator a rally will not be sustained). Or maybe the technicals of the stock market are deteriorating (see: “Beware: ‘Triple Top Reverse Pattern’ Almost Complete”).
For three years now, I have been writing that all we have witnessing since March of 2009 is a bear market rally (often referred to a “sucker’s rally” or a “bounce”) within the confines of a secular bear market. That conviction remains unchanged.
What He Said:
“There is no mixed signal about this: Foreclosures in the U.S. will continue to rise, the real estate market will get weaker, and the U.S. economy will get weaker. Smart investors should seriously consider unloading their stocks of consumer-products companies that produce nonessential goods.” Michael Lombardi in Profit Confidential, March 12, 2007. According to the Dow Jones Retail Index, retail stocks fell 42% from the spring of 2007 through November 2008.