Bright Spots in an Otherwise Lackluster Recovery

1-Auto Industry    2-Capital Investment in France   3-Consumer Spending in Spain

Although there are still legitimate concerns about the future of the euro area, the recession is definitely over. Like all such episodes, this one comes with a number of pleasant surprises. Here are the three main ones:

• The first and most significant surprise from the investor standpoint is a recovery in Europe’s auto industry, along with improved stock performance for the firms involved.

• The second—and much more surprising—surprise is that the indicators we track on the French economy show a brighter outlook for industrial investment in France

• The third, and possibly most important surprise—given the risks that Spain’s sluggish economy pose for Europe as a whole—is that spending by Spanish consumers is clearly trending upward.

While none of these surprises taken alone has enough weight at this point to convince us to make any major changes to our growth forecasts, they each help restore a modicum of confidence—perhaps even with unexpected repercussions.

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Going it alone. The global economic picture is unquestionably looking brighter. Unlike previous recoveries, however, this one is fueled above all by consumer spending. The trend is especially noteworthy in Europe now that austerity policies have been scrapped. But it can also be observed in the United States—since the country has steered clear of the fiscal cliff dangers at the start of the year—and Japan, where the Abe administration’s first moves have lifted the spirits of local consumers. Even in China, sustained consumer spending is what has offset the negative impact of an end to export support. So on the whole, the environment is more encouraging. Yet the missing ingredient here is what proved to be one of the key drivers of global growth in the 1990s—world trade. This has two main implications:

  1. Global growth will be weaker than in the past, and will stay that way for some time.
  2. There will be greater risk for economies that are still too dependent on exports, i.e., the emerging economies in general and more specifically those suffering from structural imbalances—Brazil, India, and South Africa—and increasingly burdened by mounting current account deficits.