The global economy is experiencing a new economic slowdown after a sluggish post-recession recovery. This time around, the global economy could be facing more severe issues.
In 2008, when the U.S. economy led to a global slowdown, emerging markets still had demand present and were able to hold up the global economy to a certain degree. Now the scenario is completely different.
Instead of the economic slowdown going from the U.S. out, it is now going from the remainder of the world into the U.S.
The emerging economies that fuelled the shaky recovery are struggling to keep their engines running. Countries like China are witnessing an economic slowdown due to the spillover effect of the European slowdown. The economic slowdown in China is becoming severe. With Chinese manufacturing slowing down, local demand decreasing and exports in a slump, we expect the Chinese economy to grow around seven percent this year—its lowest growth rate in more than a decade. (Source: Reuters, October 3, 2012.)
The Chinese economy is not the only economy sending waves of uncertainty into the global economy.
The mainstream media has been glorifying the efforts by the central banks to expand world monetary bases (create money out of thin air) in their continuous fight against the global economic slowdown. But the truth is that world central banks have not been successful with their policies—not a lot has changed.
Just yesterday, the International Monetary Fund (IMF) lowered its outlook for the global economy. The IMF expects the global economy to grow at the pace of 3.3% in 2012 and 3.6% in 2013, compared to the 3.5% and 3.9% previously projected. (Source: International Monetary Fund, October 8, 2012) The IMF lowered its outlook due to increased risk.
Similar to our predictions, the IMF believes that the eurozone crisis is still the biggest threat to the global economy. The uncertainty is still high and it’s leading to lower confidence. We see the chance of more countries leaving the euro membership as high.
We are currently in a fragile economic environment where one step in the wrong direction (e.g. a European bank failing, the discovery that China’s economy is decelerating quicker than what they’re telling us, a spike in inflation) could throw world markets into a tailspin.
Let’s put it this way: I would be extremely surprised to wake up one morning to the news that Dow Jones Industrial Average futures were up 500 points. I wouldn’t be surprised at all to wake up one morning to the news that futures on the Dow Jones Industrial Average were down 500 points.
Where the Market Stands; Where it’s Headed:
I started warning a few months back about third-quarter 2012 earnings being softer than expected. Last night, Alcoa, Inc. (NYSE/AA), the world’s largest aluminum producer, reported what I thought were terrible earnings: a third-quarter 2012 net loss of $143 million, compared to a net loss of $2.0 million in the second quarter of 2012 and compared to net income of $172 million in the same period of 2011.
Chevron Corporation (NYSE/CVX) said last night that its third-quarter earnings would be “substantially” lower than the previous period. Both Alcoa and Chevron stocks were hammered overseas during the night.
Now that the focus is off QE3, it’s back onto what really matters: corporate earnings. And I don’t think investors will be very happy with what they see from the third-quarter earnings as they are released in the weeks ahead. (See: First Time Since 2009: Earnings Growth for S&P 500 Companies Turns Negative.)
What He Said:
“Many of today’s consumers have purchased properties with very little down payment. They’ve been enticed by nothing-down, interest-only second and third mortgages. Bottom line: The lower-interest-rate environment sucked consumers into the housing market big-time. And that will eventually cause us all problems.” Michael Lombardi in Profit Confidential, June 22, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.