Global Economic Growth Summary

Global Economic Growth Summary

Economic growth ground to a halt in much of continental Europe in the second quarter. Real Gross Domestic Product in the Euro-Zone was essentially flat, with GDP down in Germany, France, and Italy. Industrial production also fell in Europe in the second quarter as big declines in May were not fully reversed in June. However, the European Union’s production expectations index, still in positive territory in July, suggests that May’s big decline in industrial production
overstates the weakness. The Markit PMI (purchasing managers index) for the Euro-Zone suggests slowing but still-slightly-positive growth in manufacturing.

The proximate cause of the recent economic weakness in Europe is the hit to consumer and
business confidence caused by tensions between Ukraine and Russia. The (German) ZEW Economic
Sentiment Index has fallen sharply since January and in July suffered its largest one-month decline since 2012. But the weakness also reflects the slow underlying growth rate caused by high government debt, demographics, and structural rigidities. When the trend rate of growth is only 1-2%, it doesn’t take much of a negative shock to drag the growth rate down to zero.

Off the European continent, growth is much better. Real GDP in the United Kingdom has grown
at an above-trend rate for six consecutive quarters, raising year-over-year growth to 3.2%, the highest
among major developed countries. Growth has also been strong in Ireland. Ireland hasn’t reported
second-quarter data yet, but real GDP was up 5.1% year-over-year in the first quarter.

Economic weakness is not confined to continental Europe. Real GDP declined sharply in Japan
in the second quarter, albeit not as much as feared. The April 1 increase in the Value-Added Tax shifted economic activity from the second quarter to the first quarter. GDP declined at a 6.8% annual rate in the second quarter after rising at a 6.1% rate in the first quarter. Industrial production in Japanese manufacturing, which rose 11.2% from November 2012 to January 2014, has fallen 7.1% since then. Elsewhere in Asia, there is still no growth in manufacturing in Korea. Industrial production in Korean manufacturing was at the same level in June 2014 that it first reached in February 2012. Growth in industrial production has perked up in Australia, India, and Taiwan. Growth seemed to be picking up in China in May and June, but a series of weak data reports in July and a weak “flash” PMI report for August have called that pickup into question. Year-over-year growth in industrial production in July, at 9.0%, wasn’t bad, but construction was down year-to-date, and electricity generation was up just 5.3% year-over-year, its lowest growth rate since March 2013. In Chinese manufacturing, growth is concentrated in motor vehicles and consumer electronics.

Aside from the British Isles and a few countries in Asia, the only significant bright spot in the global economy is North America. Real GDP in the United States was reported to have risen at a 4.0% annual rate in the second quarter after falling at a 2.1% rate in the first quarter, and recent data suggest that second-quarter growth will be revised up. Industrial production in U.S. manufacturing rose 1.0% (seasonally adjusted) in July, pushing the year-over-year growth rate up to 4.9%, the highest in more than two years.

The Canadian economy is also doing well. Industrial production in Canada was up 4.7% year-over-year in May (latest data available). Canada shares some of the competitive advantages of the United States and benefits from strength in the U.S. auto market. Industrial production isn’t growing quite as fast in Mexico as it is in the United States and Canada, but Mexico is doing far better than the rest of Latin America, and recent reforms boost the prospects for faster growth in coming years.

There is a tendency among some market analysts to dismiss the current weakness in Europe and other parts of the world as “just geopolitics,” implying that underlying economic fundamentals are fine and that economic growth will go back to “normal” when geopolitical problems abate. There are two problems with that argument. First, underlying fundamentals aren’t that great and neither is the new “normal.” Second, geopolitics is an ever-present part of the global economy and has always played a role in causing the economic fluctuations we call “cycles.” Every U.S. recession since 1973 (and perhaps earlier) has been triggered by an oil price shock, and all of those oil shocks have been caused, at least in part, by geopolitical events. Today, persistent geopolitical problems, especially in the Middle East and North Africa but also in Nigeria and Venezuela, are keeping oil prices perhaps $15/barrel higher than they would otherwise be.

If peace were to miraculously break out in the Middle East and North Africa, oil prices would drop sharply. This would severely damage the economies of Russia and Venezuela, perhaps forcing the Russians to re-evaluate their involvement in Ukraine and prompting Venezuelans to elect a new government that would rebuild their declining oil industry. That would further lower oil prices. Given the paramount importance of oil prices to economic growth, this would provide a significant boost to global growth rates. I wouldn’t hold my breath, but one can always dream.


TRIVIA

Month & Year
Take the number of days in a leap year, add the number of months having 30 days, divide by the number of doughnuts in a Baker’s Dozen, add the number of days in March, add the square root of 9, and divide by the number of days in a week.  Which month are you left with and what year is it?

ANSWER – September of 2014

The numbers used are – 366, plus 11, divided by 13, plus 31, plus 3, divided by 7 = 9.  And of course, it is now 2014.  (All of the months have 30 days except February.)
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Teamwork
Three workers are laying a brick wall.  John can lay 1,000 bricks in three hours.  Kate can lay 1,000 bricks in two hours.  Tom can lay 1,000 bricks in six hours.  How long will it take them to lay 2,500 bricks if they work together as a team?

ANSWER – 2 1/2 hours

How many bricks can be laid in six hours?

In six hours John lays 2,000 bricks.  Tom lays 1,000 bricks.  Kate lays 3,000 bricks.  Therefore, in six hours they individually lay a total of 6,000 bricks.

This means it will take 2 1/2 hour to lay 2,500 bricks by working together?
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My Allowance
On Monday I spent a quarter of my allowance on clothes.  On Tuesday I spent one third of my remaining money on a CD.  On Wednesday I spent half of my remaining money on candy.  On Thursday I spent my last $1.25 on a beer.  How much is my allowance?

ANSWER - $5.00

Working backwards.
• On Thursday I had $1.25.
• On Wednesday I had $1.25 X (1 divided by one-half) = $2.50.
• On Tuesday I had $2.50 X (1 divided by two thirds) = $3.75.
• On Monday I had $3.75 X (1 divided by three quarters) = $5.00.