Overview
Global growth is again subdued, and there are both core, long-term issues as well as more fleeting, cyclical triggers behind this.
Labor-force growth, the single most structural long-term driver of economic gains, just ain’t what it used to be. Driven by widespread low population growth, this may be a gift for those worried about Malthusian theories about population pressures on food and water, but it’s an economic disappointment. Without other sparks for acceleration, this alone would point strongly to modest long-term real growth and appreciation in earnings and stock prices.
One possible such “other” driver, and the second key factor behind long-term growth, is productivity, which has been more than fashionably late to this party. Though it’s now finally improving, it’s not yet showing enough vigor to offset the economic pressures arising from too few new workers.
Finally, the global flow of goods, services and labor seems to have weakened – an unfavorable shift in a setting in place for over 40 years.
The more ephemeral factors (working in years rather than decades) are a bit long in the tooth as well. The pool of un- or under-employed, which was gorged in 2009, has now been largely thinned out, with most finding jobs. Thus, even as monetary, fiscal and other policies could act as blasting caps, if the fuel is used up, then growth may fizzle.
Until we see faster birth rates, or succeed in putting a large number of underutilized workers in more productive jobs (and such a large pool is rare across the world), the future of sustained economic growth and stock gains could depend on having more women participate in the labor force.
North America
Tony M. Caxide, CFA®
Chairman - Senior Investment Council
We appear to be entering a period of moderation, as factors that temporarily sustained growth above average slowly fade away. There are positives if this world comes to pass. Inflation would likely be lower than otherwise predicted, which would benefit lower-income workers who are particularly hurt by it. But, generally, the wealth of nations, investors in financial assets, and the little guy, too, look more favorably upon faster growth.
But growth remains OK for now., if visibly slower. Our indicators don’t yet spell imminent recession, though previous stimulus taken by monetary and fiscal leaders leaves us less room for creating future opportunity or managing a shock.
And outcomes increasingly depend on unforecastable, exogenous factors such as trade conflict. We will continue to closely monitor how far our struggles with China, Mexico, Canada, Europe, Japan and S. Korea go. Did we leave anyone out?
Japan
Jeffrey G. Wilkins,
Deputy Chief Investment Officer
Many forward-looking indicators have weakened materially over the last few months, notably the leading economic indicators (LEI), the eco watchers survey, and consumer confidence. While inflation remains barely positive, it is unclear if Governor Kuroda and the Bank of Japan have the will or the tools to materially stimulate monetarily. Possible fiscal stimulus may help offset a pending sales tax increase, but it will likely not be significant enough to stimulate further growth. Thus, in the near term, it appears that Japan may be dependent on other central banks to stimulate global growth or, upon an easing of trade conflicts, to break out of this patch of subdued growth.
Europe
Srinath Sampath, CFA®, PhD
Managing Director, Portfolio Management
Unemployment in the eurozone has declined from the crisis high of 12.1% to 7.6% today, approaching the prior cycle’s trough of 7.3%. However, something is rotten in the Continent as the global slowdown claims its casualties. The combined economy grew an anemic 1.2% last year, industrial production is decreasing, and core inflation is running at 1% — substantially below the desired ‘below-but-close-to-2%’ target. ECB President Mario Draghi will complete his 8-year non-renewable term in October. The recent parliamentary elections witnessed the two biggest voting blocs losing their majority, with nationalist and populist groups, greens, and liberals gaining seats. Italy is still at odds with Brussels’ insistence on fiscal prudence, as Italian spending plans continue to be in violation of the EU’s edicts. These developments may portend lower-for-longer rates and the possibility of additional stimulus down the road.
UK
Jeff (Shengde) Liu, CFA®
Managing Director, Portfolio Management
The uncertainty surrounding Brexit remains the major theme for the UK. The announced step-down of Theresa May and the disastrous showing for both the Conservative and Labour parties in the European elections may have increased the likelihood of the more extreme Brexit outcomes. The choice for lawmakers, and possibly the electorate, may be between “no deal” and “no Brexit.” In this toxic political situation, no one can confidently forecast the final result. But either extreme could materially impact the UK economy. The Bank of England warned that a disorderly Brexit would cause the economy to contract by 8%. For now, uncertainty is pressuring the pound and subduing business investment, and UK manufacturing may have slipped into contraction. Although the service industry expanded a tad in May, it’s still not enough to lift the overall economy out of stagnation.
Emerging Markets
Jeff (Shengde) Liu, CFA®
Managing Director, Portfolio Management
China’s acceleration in the early months of 2019 appears to have been short-lived amid the sudden escalation of trade conflict, and it’s reverberating across the EM world. South Korea and Taiwan, which benefit significantly in the value chain of U.S.-China trade, were hit the hardest, with manufacturing sectors slipping into contraction and prices flirting with deflation. Mexico and India are also victims, more directly from possible U.S. tariffs. The trade troubles, coupled with the general slowdown in the U.S. and Europe, turned the second-quarter EM picture grimmer. The good news is the weakness may prompt more easing policies from EM governments. China may speed up infrastructure spending, even as significant tax cuts are already in place. Additionally, its central bank may cut the reserve ratio by another 100-150 bps by the end of 2019. India, Malaysia and the Philippines are also in easing mode.