Investment Contrarians

Europe Remains the Wildcard in the Global Economy

By for Investment Contrarians |

Europe Remains the Wildcard in the Global EconomyThe muted growth in Europe is far-reaching and negatively impacting the global economy…and the evidence for this is mounting.

Six eurozone countries are in a recession, and Germany and France could join in next year.

China, the world’s second largest economy, may still be heading for a hard landing, albeit, the government will likely do whatever it can to prop up its economic growth and make sure the growth is given help. The country’s 2012 gross domestic product (GDP) is estimated at a 7.5% GDP growth rate, according to Premier Wen Jiabao. This would be the lowest economic growth since 1990. Other pundits feel that China could still expand at over eight percent this year; however, much of the growth will be dictated by what happens with the debt crisis and muted economic growth in Europe and the eurozone, which has lessened the demand for Chinese-made goods.Japan, the world’s third largest economy, is also in an economic stalemate that is negatively impacted by the lack of economic growth in Europe.

But while the world’s top industrialized countries are at risk, the higher risk from the eurozone crisis will be on the emerging regions in Eastern Europe, much more than Asia and the United States. These emerging economies tend to be more driven by export demand.

Russia, the largest economy in Eastern Europe, is expected to see GDP growth of 3.5% for 2012, down from the previous 3.7% estimate, and 4.3% in 2011, according to internal government estimates. Inflation is also a mounting problem in Russia.

The second largest economy in Eastern Europe, Poland, reported GDP growth of 4.3% in 2011, according to the National Bank of Poland, but the impact of the weak economic growth from Europe is pushing down growth. The International Monetary Fund (IMF) slashed its projection for economic growth to 2.6% for this year. For 2013, Poland’s GDP growth could fall below 2.5%, according to the country’s Finance Ministry.

Other smaller economies in Eastern Europe are also seeing contraction in their economic growth due to their proximity to the eurozone and economic correlation.

In my view, a better play for emerging growth will likely be Asia and Latin America; albeit, should China weaken, the impact on the economic growth in Asia could be significant.

The key growth areas in Asia are known as the “little tigers,” comprised of Hong Kong, Singapore, South Korea, and Taiwan. But there are economic growth concerns here.

South Korea, the fourth largest economy in Asia, grew at 6.1% in 2010, but growth is estimated to fall to 3.5% this year, according to the Bank of Korea.

And then there is Latin America, which is estimated to slow to 3.7% this year, down from 4.5% in 2011, according to the IMF. On the plus side, growth is expected to rally to 4.1% in 2013.

The key player in Latin America is Brazil. The Latin powerhouse was estimated to grow at 3.0% this year, but analysts in the country cut the growth to a dismal 2.2%. The country has an official target goal of 3.5%, so the revision to its economic growth is disappointing. The positive is that the economy is estimated to expand by 4.2% in 2013 (lowered from the previous 4.5%), as the country builds infrastructure for hosting the 2014 FIFA World Cup and 2016 Summer Olympics.

Longer-term, I continue to like China, but there could be trouble if the country stalls amid the eurozone crisis. South Korea is worth a look, with excellent companies.

I would avoid Europe and the eurozone for now. In Latin America, stick with Brazil.

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