Caution is king as the dash for safety is merited
The slump in payroll additions to a miserable 73,000 per month average in April and May, alongside weaker capital expenditures and government outlays, suggests that further deceleration took place in the second quarter. More troubling is the fact that tax cuts and spending increases amounting to roughly 4 per cent of GDP are set to expire at the end of 2012, and the uncertainty surrounding the fiscal cliff is hurting growth.
Much has already been written on the euro zone, where the economic performance since the great recession struck trails the Japanese experience following the deflation of its twin property and stock market bubbles more than two decades ago. The periphery is mired in recession, and recent data confirm that the loss of confidence and resulting impact on economic activity has spread to the core, including Germany. It is safe to conclude that the euro zone will not provide a boost to global economic growth anytime soon.
The malaise apparent in advanced economies has been accompanied by a growth slowdown in Brazil, China, and India. The Brazilian economy slowed to a standstill in the first quarter, and expansion in China dipped to the slowest rate in almost three years over the same period, while India’s quarterly growth performance deteriorated to its worst level in seven years. A return to above-trend growth may not arrive as soon as optimists believe, given overinvestment in China, a tapped-out consumer in Brazil, and a disturbing fiscal deficit in India.
Investors have dashed to safety, as data confirmed weakness in economic activity virtually everywhere. Investors must appreciate that fiscal and monetary policymakers are short of tools with which to combat the latest weakness. Caution is warranted.