Twenty years ago, Japan was the world's second largest economy, yet it saw virtually no growth over the following two decades and global GDP was driven by the US and growth in Emerging Markets.
Today, we face a similar situation where financial commentary on the problems facing the Eurozone continues to dominate headlines, causing elevated levels of investor uncertainty and market volatility. Investors could be forgiven for thinking that Europe is the engine of global growth! Whilst many of the issues faced by Europe at the moment will be protracted and will cause a stagnation of economic growth in the region, our ‘Chart of the Month’ highlights the need for investors to be balanced when assessing the outlook for growth.
The combined European economies contribute only 19% to global GDP and this figure is closer to 13% when Germany, which has solid foundations and growth, is taken out of the equation.
In contrast, the US economy which contributes significantly more to global GDP (23%) than the EU is showing signs of a sustainable recovery driven by:
· US dollar weakness, abundant labour and cheap energy which reinstates the US' competitiveness.
· Deep cyclical industries such as auto and housing which appear to be rebounding.
· Flexible labour markets returning to growth. The unemployment rate is at a three-year low.
· Significant progression of consumer and corporate de-leveraging.
· Consumer confidence at a four-year high
· ‘Lower for longer’ monetary policy
· Efficiency and innovation driving corporate earnings.
Putting things into context
In addition to a sustainable US recovery, it is important to put the current situation into context. In this year alone:
· China will create at least four times the size of the Greek economy or one Spain in terms of new growth; and
· The BRICs will create new growth equivalent to the size of an economy the size of Italy.
Indices:
The All Ordinaries Index has moved up increasing +41 points (or +1.0%) for the week ending 29 June 2012.
The rest of the world as measured by the MSCI index increased +17 points (or +2.0%) in A$ for the week ending 29 June 2012.
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