Investments: A Dose of Reality
Growth will be slower than expected in 2014 as the world continues to slowly heal from the credit crunch and market crash. What does it mean for your investments?
The world is not unfolding as expected. The global economic recovery is much weaker than most people realized and it looks like it will be some time yet before we’re back up to speed.
The Paris-based Organization for Economic Co-operation and Development (OECD) issued a sombre Economic Outlook earlier this month in which it predicted the global economy will grow by 3.4% this year. That’s down from the forecast of 3.6% growth that it published last November.
The main reason for the cut is a significant weakening in the OECD’s outlook for China. Last fall, the projection was bullish, with growth in that country predicted to be 8.2% in 2014. Now it has been cut to 7.4%. That’s a huge difference and it indicates the organization has some deep concerns about the Chinese situation.
The report said that China’s GDP growth dropped due to a slowdown in investment in response to tighter credit conditions. Restrictions on mortgage lending and land development curbed real estate investment and sales while measures to phase out excess industrial capacity had a similar impact in that sector. As a result, the organization expects Chinese growth to remain stuck at a little above 7.25% for the next two years. That’s bad news for the world in general and for commodity prices in particular.
The OECD report said that “urgent action” is needed to reduce unemployment and address other legacies from the 2008 meltdown that destabilized the global financial system. It projects that 44 million people will be out of work across the OECD area at the end of 2015. That’s 11.5 million more than before the recession.
The organization is particularly concerned about Europe, where it says “financial fragilities” persist. It called for swift action to “complete the establishment of a fully-fledged banking union and sustain momentum for further reforms. The comprehensive assessment of euro area banks must provide reliable estimates of capital needs and be followed by swift recapitalisation, or if necessary, resolution.”
For investors, the report flashes an amber light. While growth is continuing and slowly gaining momentum, we are not looking at a major breakthrough to the upside any time soon. The China situation will remain a drag for the next couple of years anyway. The gradual improvement in the U.S. situation will partially offset that but it could be 2016 or beyond before we return to pre-recession growth levels.
This suggests that the big run-up in the U.S. markets that we saw last year was premature. That appears to be borne out by their lackluster performance thus far in 2014. As of the close of trading on May 9, the S&P was up a tepid 1.6% for the year. The Dow was flat while Nasdaq was off 2.5%. The S&P/TSX Composite was outperforming them all at +6.7%.
We have not seen a major correction of 10%+ to this point, although that may still happen. Instead, investors appear to be directionless, unsure of what to do, thereby leaving the indexes to wallow.