Equity markets across the globe declined in June as markets became increasingly concerned about the health of the global economy. Markets are trying to assess the risk to the economic growth posed by countries that are trying to rein in fiscal deficits to reduce fast-rising government debt.
In North America, the technology heavy Nasdaq (composite) led the decline with a 6.5% drop, as expectations of a recovery in technology spending faded with the weakening of the economic recovery. The commodity heavy S&P TSX composite declined 4% in June. Speculation that the growth in emerging markets led by China may be cooling off, contributed to a sell-off in Toronto markets.
The recently concluded G-20 summit in Toronto, while successful in coming out with a coherent policy added to market concern on economic growth. The gist of the G-20 summit outcome was the statement that major economies will merely “aim” to halve their fiscal deficits over the next few years.
While the immediate concern of a sovereign default risk by the European PIGS countries (Portugal, Ireland, Greece, Spain) seemed to be contained with the massive $1 trillion EU bailout package, it has not fully restored the confidence in European banks and the euro. Germany and the U.K. are aggressively pursuing policies to curtail their fiscal deficit. The newly formed coalition government in the U.K. is implementing an aggressive program of government spending cuts along with tax increases to manage the UK government deficit.
In the United States, the unemployment picture continues to be grim. For the U.S. to make a meaningful dent in unemployment rate, it needs to add 400,000 jobs a month. However, the most recent jobs report suggests that in June the economy lost 125,000 jobs. Most of the decrease in jobs was the result of the end in temporary hiring by the U.S. census bureau. Although private-sector payroll employment edged up by 83,000 in June, in the United States private sector, employment growth has been a laggard. The lack of private sector employment growth has been puzzling many economists. Typically at this stage of economic recovery, private sector employment growth starts to pick up, but is not materializing.
The silver lining is that corporate America is sitting on a stock pile of cash, $1.8 trillion dollars as detailed in a recent U.S. Federal Reserve study. Unlike previous downturns, corporate America also had a healthy balance sheet going into this recession. The big question mark that has been puzzling economists is when will the private sector start deploying the capital to generate jobs? Most of the rebound in profits so far was achieved on the back of cost cutting and productivity improvement. The belief is that the employment picture in the United States will only improve when the private sector starts using the cash reserve and makes investments leading to job creation. The concern is, if the economic recovery begins to fade, private sector will not have the confidence to make big investment decisions, a vital ingredient to a sustainable recovery.
Canada, relative to the major industrialized economies, continues to outperform. After seven consecutive monthly increases, Canadian GDP growth was flat in April. The primary reason was the decline in retail trade in Canada after a healthy growth over the last six months.
The employment picture in Canada continues to be strong. Following large gains in April, Canadian employment rose by 25,000 in May, the fifth consecutive monthly increase. The unemployment rate was unchanged at 8.1%. Since the start of the upward trend in July 2009, employment has risen by 1.8% or 310,000, a stunning development considering that the U.S., our biggest trading partner, continues to face challenges on the employment front.
However, Canada being a relatively open trading and commodity dependent economy, cannot escape any global economic slowdown. This risk to global growth is casting doubts on whether Bank of Canada will continue to raise interest rates for the rest of the year as many had expected until recently. Already the real estate market in Canada is showing signs of cooling after a strong first half for the year.
Internationally, the Chinese economy continues to be the key driver in propelling global growth and is the best performing major economy in the world. In the most recent report released in June, Chinese exports in May surged with a 48.5% growth rate. However, the Chinese government also warned that the full effects of the European debt crisis are not yet reflected in Chinese exports and export growth may slow during the rest of the year. The Chinese government is also implementing measures to rein in growth, to prevent overheating driven by a jump in property prices. The Shanghai market is witnessing a sell-off and is going through a correction.
The world economy is certainly at an interesting juncture. On one side, markets are fretting about the end to government stimulus measures and the likely impact on economic growth, while at the same time remaining concerned about rising government debt and deficits. This has created a situation in which markets are reacting day-to-day to the news of the day. It seems that markets will have a volatile summer as everyone is trying to determine if global growth will strengthen or the dreaded “double-dip” recession becomes a reality. Based on data and economic indicators, however, it appears that while we may witness a growth slow-down, it is highly unlikely there will be a double-dip recession. For investors, caution will be the key and preservation of capital should be the utmost goal in these volatile times.