June 27, 2012
Where’s the growth? With economic troubles roiling much of Europe, dampening the U.S. recovery and extending into the emerging world, is there anyplace on the map where GDP projections haven’t taken a significant turn for the worse?
It’s clear that investors looking for growth can forget about the Eurozone and even the United Kingdom. Even Germany, the strong man of Europe, is seeing its economy weaken far more rapidly than economists had believed possible; purchasing managers data released late last week showed the private sector contracting more rapidly than it has at any point in the last three years. It’s not so much Germany’s own problems that are the cause of the setback, but rather the fact that much as Angela Merkel might like to, she simply can’t find a way to separate Germany’s economic prospects from those of its Eurozone counterparts. Nor does it seem as if the United States is ready to deliver economic growth or a lasting stock market rally.
The world has, it seems, hit a soft patch. IHS Global Insight, a consulting and information company, has cut its forecast for real global GDP growth to only 2.7 percent this year and 3 percent in 2013. (IHS also argues that most of the risks are on the downside. For instance, it is projecting that Greece will leave the Eurozone within the next 12 months.) Other groups are even more bearish: The Organisation for Economic Co-operation and Development, for instance, describes the current recovery as “fragile” and “uneven” and calls for real GDP growth of 1.6 percent this year and 2.2 percent next year across its 34 member countries.
Indeed, a quick scan of the global forecasts published by various agencies, and the conclusion is a somewhat gloomy one: In most corners of the world, even those countries that are managing to beat the average when it comes to GDP growth this year are likely to post figures that are relatively disappointing when compared to their recent track record.
China has long been seen as the country with the biggest potential to prevent the world from falling into another 1930s-style depression, helping to offset contraction in North America and Europe. Admittedly, China is highly dependent on markets in both regions for exports, and thus for wages and domestic consumer spending. And admittedly, the economic data coming out of Beijing have been called into question. Yet growth there will still be the most robust of anywhere in the world, according to forecasts from Oxford Economics via Datastream – real GDP should grow 7.5 percent in China this year. But that’s almost anemic compared to the country’s recent track record of annual double-digit GDP advances. The same is true of India; Oxford Economics is forecasting its real GDP will grow by 5.7 percent this year, but that is only going to happen with a lot of effort, and it will pale in comparison with the 8.2 percent growth recorded in 2010.
Other countries with above-average growth are also expected to have trouble sustaining the pace of recent expansion. Turkey, for instance, has actually had its sovereign debt upgraded by Moody’s in a kind of victory over longtime political and military rival, Greece. The economy there has been on a tear; sovereign debt is less than half of GDP, only slightly more than Sweden and the Czech Republic. That said, growth this year likely will be 3.3 percent, less than half of last year’s 8.5 percent, according to the OECD. And GDP growth in South Korea – projected at 3.5 percent this year and 4.25 percent in 2013 – is likely to be much lower than it was only a few years ago, the OECD predicts.
A handful of exceptions to this rule can be found. Despite the slump in commodity prices, the Australian economy is still on target to expand by about 3 percent this year. Russian GDP has grown at around 4.3 percent in the last two years, and may come close to repeating that performance this year. Indonesian growth – which is likely soon to transform that country’s economy into one that is larger than that of its former colonial master, the Netherlands – is also likely to stay flat at a much higher level, just north of 6 percent. Economists also expect growth to be relatively robust in Thailand, Chile, the Philippines and Mexico.
The trick, of course, is to identify those countries that are expected to see their economies strengthen in the coming years, as well. So, while Norwegian growth rates look attractive today (the OECD predicts real GDP growth of 3 percent this year, and 4.3 percent next year), Oxford Economics forecasts that flattening out at around 2.3 percent in the following years. In contrast, Indonesian growth is likely to hover at around the 6 percent level, and growth in the Philippines is expected to stay north of 5 percent. Japan may be doing relatively well today, but forecasts are for growth to be cut by a third by 2015. Oxford Economics even hints at the potential emergence of countries like Bulgaria and Romania as relative high-growers by then.
But the macroeconomic environment is just the backdrop. Without it, it will be harder for companies domiciled in these countries to generate revenues and profits for their investors, but economic growth alone is no automatic ticket to big stock market gains. Many of the countries with above-average GDP growth rates also offer some above-average risks – low liquidity, or financial markets that are still developing. There also is political risk in several of these regions. Looking for growth isn’t just an academic exercise: it’s a reminder that a sound investment strategy has as much or more to do with risk management and stock picking than rushing headlong into what appears to be the fastest-growing economies of the world.