"The U.S. is, for better or worse, the growth engine of the world economy right now"
- Adolfo Laurenti, chief international economist for Mesirow Financial in Chicago.
It will be the plotline of scary stories parents tell their children for decades to come: in Q1 2014, the US economy was supposed to grow 3%... and then it snowed. This led to a -2% collapse in the world's largest economy. Yes, inconceivably heavy snowfall (in the winter), and frigid temperatures (in the winter), were the reason for a $100+ billion swing in US GDP. Well, as the following chart from DB's Torsten Slok shows, of the roughly $2 trillion in GDP the global economy is expected to grow in 2015, about 90% of that is expected to come from China and the US!
And while we reserve judgment for what the ongoing housing slide in China may mean for global growth (recall "the aggregate exposure of China’s financial system to the property market is likely to be as much as 80% of GDP" which means about 70% for the upside in global GDP), we don know one thing: it better not snow in the US this winter.
In fact, with a global economy set to grow only in a priced to perfection US and Chinese environment, the weather better not deviate from the norm by more than 1 degree on any given day or else the global economic recovery gets it.
Ok fine, no snow. But is it realistic to assume a tri-coupling: namely a break of China and the US from the rest of the world? That answer is up to the reader, but as Goldman shows, aside from snow, in a world in which Europe has now unofficially entered a triple-dip recession and Japan has admitted that Abenomics has failed...
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... just as we explained over the weekend, the US economy has numerous pitfalls to avoid if there is to be no US, and thus, global recession in the coming year. Here is what the WSJ said on the issue overnight:
“The U.S. for now is growing on its own, but it cannot grow on its own in the medium to long term,” said Eugenio Aleman, a senior economist at Wells Fargo. “We will need some help from the rest of the world.”
In addition to the external threats posed by China and Europe, the U.S. is contending with a host of others: new volatility in stock markets; falling commodity prices; and declining output and demand in big emerging markets like Brazil. That’s on top of political tensions in Russia and Ukraine and jitters over the Ebola virus.
“The U.S. is, for better or worse, the growth engine of the world economy right now,” said Adolfo Laurenti, chief international economist for Mesirow Financial in Chicago. “But with many other regions not performing, we may have some limit to how much momentum we can gain.”
The bottom line:
Economists doubt the U.S. can dodge all harm if the weaknesses overseas mount, creating the potential for a negative feedback loop of soft growth. Emerging economies, not the U.S., drove global growth for much of the last decade. Now, many of those markets—Brazil, Russia and South Africa, for example—are slumping and relying on the U.S. for growth. Together, they represent a global economy that isn’t firing on all cylinders.
But snow or no snow, here once again from Goldman, is a chart of all the upcoming likely scapegoats which will be used by pundits to "explain" why, once again, the US rebound is set disappoint.
As shown in Exhibit 1, the simulation implies that the 0.3pp cut to our global GDP forecasts since July--which equates to almost a 0.5pp cut to the non-US forecast--should shave less than 0.1pp from US growth in 2015 through the end of 2016. Admittedly, the impact grows once we include the appreciation of the US dollar, which is also partly due to the weakness of global growth. However, the impact diminishes again once we include the drop in oil prices and the decline in bond yields, both of which are likewise partially due to the weakness in global growth. The overall impact from including all of the recent changes in growth forecasts and financial market moves is a 0.1pp hit to US growth, assuming we see a reversal of the recent equity and credit market weakness, as projected by our strategists and as partially realized over the past few trading days
Bottom line: while lower rates and oil prices are set to boost US growth, these will be more than offset by the global slowdown and stronger dollar headwinds. But the biggest intangible: weaker equity and credit markets. Because just as the relentless Fed pump of the S&P managed to give the impression that things in the economy are improving, so any sharp, and ongoing, selloff in risk is sure to hold and in fact, reverse, any so-called recovery. Which is also why, as Carl Icahn explained it succinctly last night, "The Fed Turned This Market Around Here."
Now, about that GDP weather forecast...