Signs of a Slowdown in Global Growth

It is late in the global business cycle and market valuations are high.

Now there are signs that global economic growth is beginning to wane.

We are less than midway through the year and some market participants are already spotting cracks in global growth. Some observers fear that a whiff of #stagflation is starting to permeate. Stagflation is typically described as persistently high inflation and high unemployment, combined with weak economic demand.

It was just three months ago that stock-market investors were being swept up by a euphoria pinned to the idea of economic expansion taking hold harmoniously across the globe.

However, worry of a slowdown that has so far overshadowed a run of solid results from some of the most highly valued and most influential U.S. corporations.

And so far there has been much news to be pleased about. About half the #S&P 500 companies have reported first-quarter results during the busiest week of the season. Their #earnings have grown at a rate of 22.9%. Moreover, approximately 80% of those companies reporting results surpassed analysts’ earnings estimates, better than the 74% four-quarter average. And earnings outperformance was substantial, with companies surpassing average estimates by 9.4%, above the average of 5.1%.

However, there have also been some negative signs.  In the U.K., in the first quarter the economy grew at the slowest pace in more than five years. And industrial output in February, fell by 1.6% in Germany. That slide came as overall business activity in Europe had begun to lag amid persistent concerns of the imposition of tariffs by President Trump’s administration.

Against that backdrop, inflation has been percolating. Commodities, particularly West Texas Intermediate crude-oil futures, have gained sharply in recent weeks.

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Rising Oil Prices

Rising oil prices are great for OPEC and oil exporters, for US shale producers and their capex plans (or at least, stock buybacks plans), and for those long energy equities.  However, they are less great for everything else.  Higher oil prices carry a long list of adverse consequences.  Chief among these is that rising oil/commodity costs pressure margins and result in weaker consumer spending.  In short, they transfer wealth from oil importers to oil exporters, and benefit stocks at the expense of the economy.

It is this trade off that is becoming a major concern to some clients of Goldman Sachs.

And Mountains of Debt

And we should not forget that the U.S. is operating under mountains of debt.  The thesis is easy and acquainted: America is operating a fiscal deficit and a present account deficit (i.e. “twin deficits”) and depends on home and overseas traders to purchase US Treasuries.  This was, in a nutshell the grim message from the IMF’s newest Fiscal Monitor Report, which warned that the US could be the one nation with rising debt ranges over the subsequent 5 years.

What the IMF didn’t elaborate on, nevertheless, is that in lots of nations, such twin deficits have resulted in a debt disaster. So, selecting up the place the IMF left off, Deutsche Financial institution carried out an evaluation which discovered that “the deteriorating fiscal and exterior scenario for America have elevated the likelihood of a US debt disaster by 7 share factors, from a historic common beneath 9% to a stage round 16%.”