Where’s the Growth???

February 20, 2015                     Playa 9

So, with stock markets in the developed world on a tear and the Fed and the Bank of England considering hiking interest rates, one would think economic growth is back with a vengeance. After all, stock markets are fueled by expanding economic activity, right?

World GDP

Source: Datastream, IMF, Intercam

Well, not so, at least this time around.

Growth is back, yes, but barely. The US and UK economies, the strongest and healthiest among developed countries, are only able to sustain a roughly 2.5% annual growth rate, and this is without any interest rate increases. If and when rates finally rise later this year, it will be inevitable that they will take some wind off these sails.

Meanwhile, the Euro Zone finally posted 4 quarters of positive growth in 2014, thanks to an improving performance by Germany, but the fastest quarterly pace was only 0.3%, and full 2014 growth still ended shy of 1%. Japan finished the year flat, while China missed the official growth expectations to advance by only 7.4% in all of 2014, the slowest rate in decades.

Overall, 2014 was a better year than 2013, but still, not much to write home about. In the end, we have the US and UK growing only modestly, the Euro Zone and Japan still openly flirting with recession, and a deeper-than-expected deceleration in China.

The markets have been responding to the enormous amounts of liquidity in the international financial system and to the lack of worth-while investment alternatives, more than anything else, and therefore remain fragile.

However, in spite of all the doom and gloom, despair should not even be contemplated for 2015. We believe growth rates will improve further, backed authorities everywhere, starting with central banks’ decisions and actions – recent rate-cuts all over the world are all about slow growth and extremely low inflation, much more than competitive devaluations to favor exports. Greece reaching an agreement with the Troika to move forward is yet another example of authorities’ greater understanding of the need for growth and willingness to provide impetus. This hands-on approach to improve activity and dynamism will undoubtedly go a long way to pull back from recession those economies at the brink, and to jumpstart the ones advancing slowly.

Patricia Berry