Friday, October 17, 2014

US consumers key to global economic growth

The drivers of this risk-off phase that I have highlighted repeatedly this year are global growth weakness, deflation, and concerns about policymakers in the euro-zone, Japan, China and, importantly, the US. Broad markets have been looking for decent growth recoveries in Europe and Japan all year, and have been looking for the Fed to start its rate hike cycle. 

At the risk of being repetitive, I will state clearly in my view that we will not see strong sustained economic recoveries in the major global economies anytime soon, particularly in Europe and Japan. 

Global deflation should remain the dominant theme, and I repeat the message from my last note that I do not expect the Fed to be hiking rates for a long time – late 2016/2017 seems to me the earliest possible time that the Fed may hike.

In my last note I made particular mention of the fact that, in my view, the US economy was nowhere near strong enough to offset the deflation it would import and is already importing through USD strength vs EUR and JPY in particular, and this has now become a key market theme. 

In particular, much of the evidence I see points to the fact that the US consumer is neither willing and/or able to lever up to support or boost its consumption (thereby dragging the global economy into a period of sustained stronger growth). I think markets are not fully appreciating the longer-term consequence of the events of 2007 through to 2009 in particular. Confidence has been hit hard in a semi-permanent manner. And in the absence of the US consumer it is not clear who is going to drive global growth, particularly as the growth model for Europe, Japan, and the emerging economies is built around competitive devaluations all designed to boost exports, especially into the US. Governments are retrenching, and the corporate sector, increasingly globally, is focused on financial engineering to optically boost earnings, as opposed to focusing on capex, investment and hiring.