Weekly Global Update for April 24, 2013

Thanks to my colleague Ed Henderson, below is the economic update section of his April "Henderson Electronic Market Forecast." I was traveling internationally last week and appreciate Ed’s allowing me to provide this information.

If you wish to get Ed’s complete 26 page monthly report you can contact him at 1-650-961-2900 or hen.ven@Comcast.net.

I have included Ed’s multiyear regional forecasts for GDP (Chart 1) and electronic equipment production
(Chart 2).

Global Economy Continues to Struggle

Manufacturing Follows Suit

During 2010, global manufacturing activity soared on the wings of deficit spending and low interest rates. Since then, interest rates have remained low, but expansive fiscal policies have given way to retrenchments aimed at reducing budget deficits. As a result, manufacturing activity has largely stagnated over the past 18 months, or so. There was a slight uptick in March, but the global Purchasing Managers Index (PMI) increased to only 51.2 after a 50.9 reading in February. While the March posting was tepid, it did represent the fifth successive month of expansion.

Europe Continues to be a Drag on Global Growth

Although the US PMI fell from 54.2 in February to 51.3 in March, the nation's manufacturing continues to be among the strongest regional performers. In contrast, the Eurozone PMI for March was 46.8. The continuing contraction of European manufacturing activity parallels its economic output, which fell at an annualized rate of 2.3 percent during the fourth quarter.

Moreover, early indicators suggest that Eurozone GDP fell again for the sixth consecutive quarter during the opening three months of 2013. During February, Eurozone unemployment was 12.0 percent, a statistic that averaged a wide range of labor problems. That is, Austria and Germany turned in unemployment rates of 4.8 percent and 5.4 percent, respectively. But Spain's jobless rate rose to 26.3 percent. And even though the sovereign debt crisis in Cyprus appears to be under control, at least temporarily, the jury is still out on a long-term solution. And the rescue package for Portugal is now endangered because the nation's Constitutional Court decreed that the agreement was partially deficient.

And the recent Italian elections underscore the lack of political will to implement structural reforms. In short, the Eurozone foundations continue to wobble. As a result, the West European economy is expected to dip by 0.1 percent this year after a 0.3 percent decline in 2012. And even as economic performance improves during the next two years, growth rates are forecast to reach only 1.7 percent in 2015.

Japan Opens the Monetary Spigot

The Japanese economy has suffered from 15 years of continuous deflation. And because prices have, by definition, declined during that period, consumers have been able to "save" even though they earned near-zero interest in their bank accounts. The disincentive to spend has resulted in declining real consumer outlays and, therefore, GDP. But now, the new Bank of Japan (BOJ) Governor, Haruhiko Kuroda, has vowed to achieve a two percent inflation rate within two years by flooding the economy with yen. The easy-money policy is expected to lift Japanese GDP from a meager 0.8 percent gain this year to 2.4 percent in 2014 and 2.2 percent in 2015. The policy has already had a dramatic impact on the yen. It has declined by almost 18 percent between September 2012 and March 2013. As a result, exports are beginning to accelerate.

Murky Statistics from China

The Chinese economy grew at a very healthy 8.2 percent annualized rate during the fourth quarter of last year. A solid performance is predicted for the first quarter of 2013 even though the PMI came in at 50.9 according to official Chinese statistics.

But the recent data are questionable. The Chinese New Year fell in February this year versus January in 2012 thereby making year-to-year comparisons rather challenging. Moreover, Chinese statistics indicate that exports rose by 19.8 percent in March on a year-to-year basis. But imports to Hong Kong, the first stop for most outgoing trade, were far less robust. Exports may be suffering from an appreciating yuan. Still, Chinese economic activity is expected to remain solid through 2015 even though annual growth rates will remain under 9 percent for the foreseeable future.

The continuing currency crisis in Europe, along with political inaction in the U.S. and sagging performances among the emerging economies, will result in little near-term progress for the world economy. In fact, GDP is predicted to decelerate from 2.6 percent in 2012 to 2.5 percent in 2013. But, hopefully, as growth impediments are successfully dealt with, GDP will accelerate to a 4.1 percent rate in 2015, as shown below.