U.S. Financial Recovery and the World

By George Leong, B.Comm — The Leong Side of the Market column

It will take some work to drive stocks higher to sustainable gains. We are seeing some hesitation in the upward movement of stocks despite what has been a fairly decent earnings season so far. The problem I see is the influx of uncertainties that is making traders think hard about going long.
While there are problems in the United States, you must also consider the global economies. Without renewal in foreign markets, we cannot expect a sustainable recovery.Take a look at the comparative growth rates. In Europe, there are concerns with the slow growth there. In Germany, the GDP growth in 2010 is pegged at a weak 1.5% but a nice reversal from a five-percent decline in 2009. Growth in 2011 is even lower at 1.4%. In
comparison, the U.S. economy is predicted to grow 2.8% this year and moderate to 2.4% in 2011.The Organization for Economic Cooperation and Development (OECD) reported that the world’s rich economies will slow in the first half of 2010, but expects growth in the U.S. and Japan to exceed that in Europe. The growth in Japan is significant as the country tries to turn the corner after two decades of doing very little. Growth in Japan will also help to drive the export market in China. I feel Europe may continue to underperform the global markets in 2010 and 2011.Overseas in Europe, the 27-member European Union (EU) is dealing with the debt issue in Greece. The situation in Greece simply will not go away. There are again renewed concerns about Greece’s ability to make a debt payment on May 19 prior to receiving emergency funds.
There are concerns that the funds advanced will not be enough to avoid the situation impacting other European countries. There is also speculation of problems in Ireland, Spain, and Portugal.

The EU is critical to the global economic recovery. There are over 500 million citizens in the EU, accounting for about 28% of the world’s gross world product in 2009, according to data from the International Monetary Fund. Weak members such as Greece may need to be dropped from the EU until such time that they can rebuild their financial infrastructure. The last thing the EU wants is weak members dragging the member group down, especially at a time when the countries are trying to rebound from the global recession.

There are also issues in China. Despite astounding GDP growth in the first quarter of 11.9%, I sense that the property market there is overdone. Real estate prices for residential property are surging and we are seeing speculators driving prices higher to unsustainable
levels. The Chinese government realizes this and is acting to deal with it before it implodes. The Chinese government will make it harder to speculate on property in the country’s hot real estate market via new restrictions on down payments and the use of leverage. Yet,
while I feel that this is necessary to avoid a potential real estate bubble, the fear is that the move could impact growth in China, which could spill over to other markets worldwide, since China is now a major player.

The bottom line is that sustained growth in America cannot be achieved without renewal in the major world economies.