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Global economic confidence lies in the hands of the American consumer

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11/07/2012
Investor confidence in the global economy could lie in the hands of the American economy, according to Barings Asset Management.
Global economic confidence lies in the hands of the American consumer

Positive housing market indicators and healthier consumer fundamentals could help restore global confidence, as the US housing market and automobile markets show signs of growth, according to the latest Barings global macro research.

However, Barings believes that ‘political squabbling’ in the run up to the US presidential elections and the fast approaching ‘fiscal cliff’ could potentially forceUS consumers to sit on cash and US businesses to adopt a sedentary approach. 

The firm predicts that the US ‘wait and see’ approach has the potential to slow growth by up to 1% of GDP with both Republicans and Democrats approaching the November elections at odds over the solution to the ‘fiscal gridlock with no obvious path to a deal in sight’, potentially denting consumer and business confidence in the short term.

Percival Stanion, head of asset allocation and chairman of the Strategic Policy Group at Barings, said: “We are concerned that even if the underlying trend in the US is one of reasonable growth, the second half of the year could be damaged by the perception that the proposed public sector spending cuts after the Presidential election could derail the economy.” 

“The prevailing consensus is that Congress will act early in 2013 to forge a new compromise involving only moderate fiscal tightening. However, with the election campaign likely to get quite nasty, an early agreement might be wishful thinking.”

“Even if this does materialise, US businesses may well adopt a ‘wait and see’ approach and postpone capital spending and hiring programmes.”

The ‘fiscal cliff’ represents around $700bn, roughly 4.6% of US GDP, worth of expiring tax cuts, automatic spending cuts and other fiscal tightening measures, which are set to take place in January 2013.

All eyes turn to the US economy as further pessimism over the state of the Eurozone economy takes hold of investor confidence.

Barings attributes this gloomy global economic outlook on factors such as a policy stalemate concerning the Euro crisis and slowing growth in China, whi8ch could increase the chance of the global economy falling back into recession in 2013.

However, Barings sees positive signs emerging from the US automobile and housing markets, which will have a positive effect for the global economy in 2013.

 

The automobile market has improved after the ‘cash for clunkers’ drive in 2009. More significantly, since 2008 – the US housing market is recovering steadily.

States such as Florida, Las Vegas and California have cleared their backlog of repossessed properties while residential rental yields have become an attractive option.

US residential building permit levels have risen 7.9% to their highest level since September 2008.

Barings highlight that a powerful recovery in US housing is still not certain, but it could potentially add up to 1% to US GDP.

Percival explains: “The US is vital to restoring overall global consumer confidence. If US consumers start spending, the rest of the world will get a huge boost. Large sectors, such as the automobile and housing markets, can lead the way in re-energising markets.”

“However, while it is our view that the “fiscal cliff” is unlikely to happen, it is the delay in making a decision on this issue that will keep the US economy, and the rest of the world, stationary.”

Barings believes that Europe, however, remains trapped in a stalemate between the North and the South, with the North unwilling to surrender sovereignty over its credit rating until the South surrenders sovereignty over national budgets.

Percival added: “Small concessions such as the €100bn bailout of the Spanish banks are simply bandages being applied to the symptoms of the crisis, rather than treatment applied to the underlying cause.

“Markets remain in a very sceptical mood and any piecemeal measures seldom provoke more than a very short-lived rally. Simply put, the markets require a more comprehensive solution. The issues of competitiveness in Southern Europe have yet to be tackled and fiscal deficits are still not under control.”

In China, Barings sees ‘very clear signs of slowing economic activity while the government moves to a more activist stance, cutting interest rates and directing the banks to increase lending.’

However this still falls a long way short of the type of stimulus package that was implemented following the acute onset of the global financial crisis in 2008.

Percival concludes: “Part of the problem is that conditions in China are just not as bad as 2008/09 and therefore do not justify such a fiscal boost.

“This is also a leadership transition year and officials are likely to be reluctant to embark on aggressive policies that could be repudiated within a very short time period, with possibly negative career effects.”

Barings also expects central banks to announce further asset purchase programmes, but their capacity to lift markets permanently seems to be diminishing.

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