Why isn’t the Rest of the World Growing like US?

August 19, 2014

Investors continue to be faced with a great deal of geopolitical uncertainty. While the cease-fire between Israel and Hamas continues, the geopolitical news regarding the conflict between Ukraine and Russia as well as ISIS and Iraq have escalated. In fact, last Friday, markets experienced a roller-coaster of a day on news of Russian armored vehicles entering into Ukraine. Russia denied the incident, but the markets’ reactions tells us the investors are nervous about the future of this conflict.

Investors are also nervous about what impact these conflicts are having on economic growth. Trade sanctions and fear brought on by the uncertainty of war added to the already challenged growth in Europe. Last week we saw that the Gross Domestic Product (GDP) growth rate in the Euro-zone slowed to 0.2% for the second quarter according to Eurostat.

Germany, France and Italy were among a few of the nations that saw a decline in economic activity during the second quarter. These economies shrank by -0.6%, -0.8%, and -0.1%, respectively. On the bright side, there were many economies that experienced economic growth in the quarter including Spain and Netherlands. Those economies grew by 2.4% and 2.2%.

The European economy still is recovering from the debt crisis they experienced a few years back and the austerity measures that were implemented to help improve the fiscal condition of multiple nations (e.g., Portugal, Ireland, Italy, Greece and Spain). However, while each European nation is different, a number of the leading indicators suggest that growth should increase in the third quarter and throughout the balance of the year. The impact that the Russia-related sanctions will impose should be minimal unless the conflict intensifies.

Looking at another key global nation, we see that Japan’s economic activity declined by -6.8% in the second quarter. A second quarter decline was widely expected as Japan increased its national sales tax from 5% to 8% on April 1. This pulled growth from the second quarter into the first quarter as consumers made major purchases ahead of the increase. Since a decline was widely expected, investors took the news in stride.

Despite some country specific events, the world’s economy is still healthy. While the weather induced economic slowdown the U.S. experienced in the first quarter helped contribute to the International Monetary Fund reducing the calendar year global GDP estimate in July by 0.3% to 3.4%, growth expectations for 2015 were unchanged at 4.0%.

A world growth rate of 3.4% is fairly good considering how many developed nations still have high unemployment and are recovering from the Great Recession. In fact, if we hit this level of growth for the year, it will be our fifth straight year with world GDP growth over 3%. In spite of all the headlines, the world’s economy continues to grow.

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