Economic Growth: Is the glass a third full or two thirds empty?

Weak growth

Real global economic growth was weak in Q1. Estimates put economic growth at an annualised 1.5% (q/q). Thus the long-term trend of downward revisions is intact, which keeps the fears of global economy possibly heading for persistent stagnation alive.

Growth dent?

In terms of sectors, this development was broadly based. Retail sales, industrial production, exports, and company investments have been weak. As far as countries are concerned, the economies standing out are the USA (stagnation), China (drastic weakening) as well as Russia and Brazil (shrinking). Interestingly, the Eurozone, Eastern Europe, and Japan recorded accelerating growth rates. These countries account for almost a third of global GDP. Was the weak global economic growth in Q1 short-lived? Is the glass one-third full or two-thirds empty?

The new stars

At real growth of 1.6% and 2.4%, respectively, the Eurozone and Japan recorded accelerating growth rates over the previous quarter. Here are two exemplary, positive developments: first, the lending volume of banks to other countries within the Eurozone has started to grow. This suggests a decline in the fragmentation of the financial market in the Eurozone. Second, the deflator in Japan is rising and has reached 3.4% in Q1 (y/y). The average since 1955 is -0.8%.

Weak signals

The signals of an increased growth rate in Q2 are few and far between, with economic indicators such as industrial production and exports in April suggesting no improvement on a net basis. The important leading indicators of the OECD, too, are on a decline. And lastly, the data surprises have also been largely negative. On the upside, the initial estimate for the global purchasing managers index in Mai has increased slightly. That being said, this indicator had failed to predict the decline in GDP growth in Q1.

Assumptions

For global economic growth to accelerate in Q2 towards its potential (about 2.5%), at least three assumptions have to be made. Firstly, some factors that are responsible for the stagnation in the USA (bad weather, strikes) are only temporary. Secondly, the loosening measures in the Chinese economy are effective enough to generate increased growth. Thirdly, the weak global economy hardly affects the cyclical upswing in Japan and the Eurozone.

High noon with Greece

The impending default of Greece is one of the risk factors for the markets. The time of a decision in favour or against defaulting is approaching. The conflict of the various institutions with Greece illustrates that the institutional framework necessary for the functioning of the Eurozone that would effectively coordinate the fiscal and economic policy does not exist (yet). If a country faces a debt overload, there are basically only three ways to handle the situation, with neither one of them looking particularly enticing:

1. Credits and transfer payments to the country in question. Without structural reforms in the receiving country, these measures are unpopular in the paying countries. Since saving and the reduction of unit labour costs trigger recessions and high unemployment, said reforms are unpopular in the receiving countries. If both parties act rationally, a compromise is the most likely solution.
2. Exit from the Eurozone and devaluation. If the devaluation of the currency does not go hand in hand with structural reforms, the ensuing chaos in the devaluing country is not only short-lived. N.B. the monetary zone is apparently not linked by inseverable ties.
3. If the central bank provided money directly to finance the budget deficit, it erodes the currency.

Killjoy Fed

The US Fed members have suggested the launch of a cycle of Fed funds rate hikes this year. In doing so, they mentioned an important condition: the economy had to improve as expected by the Fed. This means that if it turns out that the stagnation in Q1 was really only a dent, the Fed Funds rate is likely to be raised in September or a bit later.

Conclusion
The combination of weak economic growth and a loose monetary policy supports many asset classes, even if bond yields and earnings prospects are subdued. In this environment the markets may experience strong movements if the market participants change their expectations even just by a moderate degree – either positively, such as in the case of the Eurozone, or negatively, if Greece defaults of the Fed increases rates excessively.

 

This document is an advertisement. Unless indicated otherwise, source: Erste Asset Management GmbH. The language of communication of the sales offices is German and the languages of communication of the Management Company also include English.

The prospectus for UCITS funds (including any amendments) is prepared and published in accordance with the provisions of the InvFG 2011 as amended. Information for Investors pursuant to § 21 AIFMG is prepared for the alternative investment funds (AIF) administered by Erste Asset Management GmbH pursuant to the provisions of the AIFMG in conjunction with the InvFG 2011.

The currently valid versions of the prospectus, the Information for Investors pursuant to § 21 AIFMG, and the key information document can be found on the website www.erste-am.com under “Mandatory publications” and can be obtained free of charge by interested investors at the offices of the Management Company and at the offices of the depositary bank. The exact date of the most recent publication of the prospectus, the languages in which the key information document is available, and any other locations where the documents can be obtained are indicated on the website www.erste-am.com. A summary of the investor rights is available in German and English on the website www.erste-am.com/investor-rights and can also be obtained from the Management Company.

The Management Company can decide to suspend the provisions it has taken for the sale of unit certificates in other countries in accordance with the regulatory requirements.

Note: You are about to purchase a product that may be difficult to understand. We recommend that you read the indicated fund documents before making an investment decision. In addition to the locations listed above, you can obtain these documents free of charge at the offices of the referring Sparkassen bank and the offices of Erste Bank der oesterreichischen Sparkassen AG. You can also access these documents electronically at www.erste-am.com.

N.B.: The performance scenarios listed in the key information document are based on a calculation method that is specified in an EU regulation. The future market development cannot be accurately predicted. The depicted performance scenarios merely present potential earnings, but are based on the earnings in the recent past. The actual earnings may be lower than indicated. Our analyses and conclusions are general in nature and do not take into account the individual characteristics of our investors in terms of earnings, taxation, experience and knowledge, investment objective, financial position, capacity for loss, and risk tolerance.

Please note: Past performance is not a reliable indicator of the future performance of a fund. Investments in securities entail risks in addition to the opportunities presented here. The value of units and their earnings can rise and fall. Changes in exchange rates can also have a positive or negative effect on the value of an investment. For this reason, you may receive less than your originally invested amount when you redeem your units. Persons who are interested in purchasing units in investment funds are advised to read the current fund prospectus(es) and the Information for Investors pursuant to § 21 AIFMG, especially the risk notices they contain, before making an investment decision. If the fund currency is different than the investor’s home currency, changes in the relevant exchange rate can positively or negatively influence the value of the investment and the amount of the costs associated with the fund in the home currency.

We are not permitted to directly or indirectly offer, sell, transfer, or deliver this financial product to natural or legal persons whose place of residence or domicile is located in a country where this is legally prohibited. In this case, we may not provide any product information, either.

Please consult the corresponding information in the fund prospectus and the Information for Investors pursuant to § 21 AIFMG for restrictions on the sale of the fund to American or Russian citizens.

It is expressly noted that this communication does not provide any investment recommendations, but only expresses our current market assessment. Thus, this communication is not a substitute for investment advice, does not take into account the legal regulations aimed at promoting the independence of financial analyses, and is not subject to a prohibition on trading following the distribution of financial analyses.

This document does not represent a sales activity of the Management Company and therefore may not be construed as an offer for the purchase or sale of financial or investment instruments.

Erste Asset Management GmbH is affiliated with the referring Sparkassen banks and Erste Bank.

Please also read the “Information about us and our securities services” published by your bank.

Subject to misprints and errors.