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Global Economy Seen Slowing to 3.25% From 4.7% Recent Average
2010-07-25 23:01:01.1 GMT
By Rich Miller and Simon Kennedy
July 26 (Bloomberg) -- The new normal for the world economy
may be arriving as the U.S., Europe and China all decelerate
simultaneously.
After policy stimulus and inventory-rebuilding pulled the
major economies out of recession with 5 percent growth in the
first quarter, they are slouching toward a weaker expansion,
even as they show signs of dodging a double-dip. Global growth
may average 3.25 percent to 3.5 percent in the next three to
five years, well below the 4.7 percent pace of the five years
leading up to the 2008 slump, estimates Stephen Roach, non-
executive chairman of Morgan Stanley Asia.
Behind the deceleration in the long-run noninflationary
growth rate: consumer retrenchment in the U.S. and fiscal
consolidation in Europe, as well as weaker bank lending and
employment in both. Chinese growth also may ebb as the world's
most populous country reorients its economy away from
manufacturing and exports.
"Post-crisis headwinds will restrain trend growth in world
gross domestic product by 1 to 1.5 percentage points," said New
York-based Roach, who also teaches at Yale University.
The new normal means investors may have to accept lower
returns and greater volatility in their portfolios, according to
Mohamed El-Erian, chief executive officer of Pacific Investment
Management Co. in Newport Beach, California, manager of the
world's biggest bond fund, who helped coin the term.
"It implies a lower overall nominal return" than the
historical average of 6 percent to 8 percent, he said.
Stable Returns
The fair value of the Standard & Poor's 500 Index is 900,
according to Jeremy Grantham, chief investment strategist in
Boston at Grantham Mayo Van Otterloo & Co. That's 22.5 percent
below the July 23 close of 1,102.66 at 4 p.m. in New York. He
says developed economies will be "lucky" to grow 2 percent
annually for the next seven years, and he favors stocks of
companies with high, stable returns and less debt.
"In the end, by hook or by crook, debt levels must be
lowered at every level" in the industrial world, he wrote in
his quarterly newsletter released July 19 on the company's
website.
Jim O'Neill, chief global economist at Goldman Sachs Group
Inc., isn't so gloomy. While acknowledging the economic cycle
"is clearly slowing," he estimates the global growth trend is
about 4 percent and may be rising, driven by emerging markets.
"Half the world's population doesn't wake up and say
'credit crisis' before breakfast," said the London-based
O'Neill, who derived the term BRICs to describe the rising power
of Brazil, Russia, India and China.
Sign of Strength
In a sign of strength, data last week showed the U.K.
economy expanded 1.1 percent in the second quarter, the fastest
pace in four years and almost twice economists' forecasts.
German business confidence unexpectedly surged to a three-year
high this month, according to the Ifo institute in Munich. Its
index based on a survey of 7,000 executives jumped to 106.2 from
101.8 in June, the biggest gain since 1990.
"Given how Germany is geared towards the global economy,
this indicator should have fallen rather than risen and, if
anything, points to a soft landing in the global economy rather
than a double-dip scenario," said Violante di Canossa, an
economist at Credit Suisse Group AG.
Investors may need to manage risk by going beyond
traditional diversification strategies of splitting portfolios
between stocks and bonds, El-Erian said in an e-mail. That might
involve the use of hedges against outsized market declines and
other portfolio-insurance strategies. Pimco is planning a fund
that will offer protection against market drops of more than 15
percent.
Forecast Shortfall
The slowdown in the recovery is evident in recent economic
reports, with a UBS AG index showing data worldwide in July
increasingly falling short of forecasts for a second month, the
worst two-month period since the recession began in 2008.
"There will be possibly a period of slower growth
beginning in end markets later this year," George Buckley,
chief executive officer of 3M Co., told analysts on July 22.
"This isn't a double-dip per se," he added. "It's just a soft
spot and very normal as economic growth takes a breather for a
while and adjusts to new circumstances."
The St. Paul, Minnesota-based company is considered an
economic bellwether because its product range spans the
automotive, consumer and health-care markets.
A net 12 percent of fund managers this month predicted the
global economy will deteriorate in the next 12 months, the first
negative outlook since February 2009, according to a BofA
Merrill Lynch Global Research survey of 202 managers overseeing
a total of $530 billion.
'New Future'
"There will be a slowdown in the second half of the year,"
said Paul Donovan, an economist at UBS in London, who pegs the
world economy's noninflationary cruising speed at about 3.5
percent now compared with about 4.25 percent to 4.5 percent
before the crisis. "This is the new future."
A relapse into recession still is unlikely, given how loose
monetary policy is in major industrial nations, Michael
Saunders, chief western European economist for Citigroup Inc. in
London, wrote in a July 21 report to clients.
The Federal Reserve, European Central Bank and Bank of
Japan all have pushed the short-term interest rates they control
down toward zero percent and taken other steps, such as buying
assets, to revive their economies.
Much of the deceleration in underlying growth appears
likely to come in the industrial world. U.S. consumers are still
working off the debts they built up during the housing boom.
Since hitting a record $1.39 trillion in the second quarter of
2008, household debt has fallen steadily to $1.35 trillion in
the first quarter, according to Fed figures.
Weak Demand
"As we look on the loan-demand side, it continues to
remain weak as consumers continue to de-lever," Brian T.
Moynihan, chief executive officer of Bank of America Corp., the
largest U.S. lender, told analysts in a July 16 conference call.
European governments are in budget-cutting mode as they
strive to meet European Union rules to push deficits beneath 3
percent of GDP following the Greek-led debt crisis.
CRH Plc in Dublin, the world's second-largest maker and
distributor of building materials, said July 7 that fiscal
consolidation is "adding to uncertainty regarding the pace of
economic progress in Europe" amid signs of "some softening in
the pace of recovery."
Cable & and Wireless Worldwide Plc, the London-based
provider of telecommunications services, last week forecast
full-year profit would be at the "lower end" of estimates
following U.K. government spending cuts.
Pre-Crisis Pace
The result of all this austerity is that trend growth in the
advanced economies will slow to about 1.5 percent a year from a
2.8 percent pre-crisis pace, Roach said in an e-mail.
While emerging markets will do better, their performance
"is unlikely to be strong enough to fully compensate for the
slowdown in the industrial world," El-Erian said.
China, the world's fastest-expanding major economy, may
even see its average growth rate slow as it is forced to adapt
to less-robust markets for its exports, said Nariman Behravesh,
chief economist for consultants IHS in Lexington, Massachusetts.
"I see a gradual deceleration in trend growth in China,
from 10 percent currently to 7 to 8 percent over the next five
years," Roach said. "By shifting away from labor-saving
manufacturing-led growth to labor-intensive services, China will
be able to maintain full employment and social stability with a
lower GDP growth rate."
Boost Local Demand
U.S. Treasury Secretary Timothy F. Geithner has warned
other nations that they can no longer depend on American
consumers to power the world economy and must boost demand at
home to make up for the shortfall.
Surging imports are starting to cut into U.S. growth.
Macroeconomic Advisers lopped 0.8 percentage point off its
estimate for the second quarter after the Commerce Department
reported on July 13 that the trade deficit widened in May to its
highest level in 18 months. GDP rose at an annual pace of 2.1
percent in the period, the St. Louis consulting company
forecasts, down from 2.7 percent in the first quarter. Commerce
is scheduled to release the figures on July 30 in Washington.
The jump in the trade deficit is bad news for President
Barack Obama, who is counting on a doubling of exports during
over the next five years to prop up growth as consumers
retrench.
Foreign Sales
The U.S. isn't the only country looking to foreign sales to
support its domestic economy. Chinese central-bank adviser Zhou
Qiren told Japan's Asahi newspaper last week that his nation
will let the yuan weaken if exports fall sharply. Japanese Trade
Minister Masayuki Naoshima said July 21 that the yen's gains
threaten his economy. The yen traded at 87.01 against the dollar
at 5:44 p.m. July 23 in Tokyo, about 2.5 percent from the 14-
year high it reached in November.
Germany relies on exports for about 40 percent of GDP,
putting Europe's largest economy in position to gain from the
euro's 10 percent drop against the dollar this year.
The "fallacy of composition" -- too many countries
counting on overseas sales to power their economies --
represents a downside risk to worldwide expansion, El-Erian
said. With foreign opportunities limited, governments may have
little option but to begin restructuring to find other drivers
of growth and sources of productivity, said Marco Annunziata,
chief economist at UniCredit Group in London.
In Europe, that means making it easier to fire and hire
workers and opening up markets to more competition, he said.
What's needed in the U.S. is quick action to reform Social
Security and health care to reduce their drain on the Treasury.
None of that will be easy. "It's going to take a long
time," Annunziata said. "We face several years of very slow
increases in living standards and sustained higher
unemployment."
For Related News and Information:
U.S. economic data indexes: ESNP US <GO>
European Union economic statistics: ECST EU <GO>
Central-bank monetary-policy rates: CBRT <GO>
Top economy news: TOP ECO <GO>
--With assistance from Charles Stein in Boston. Editors: Melinda
Grenier, Daniel Moss.
To contact the reporters on this story:
Rich Miller in Washington +1-202-624-1937 or
rmiller28@bloomberg.net
Simon Kennedy at +44-20-7330-7086 or
skennedy4@bloomberg.net
To contact the editors responsible for this story
Christopher Wellisz +1-202-624-1862 or
cwelllisz@bloomberg.net
John Fraher at +44-20-7673-2058 or
jfraher@bloomberg.net
