12/10/12 – Update on the Rest of the World

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Dec 10, 2012 11:02:35 AM

and tagged Debt Crisis, Europe

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Recently, my posts have focused on the U.S., as that’s where most of the news has been, but I wanted to take a look at the rest of the world. Although nothing particularly urgent is happening, many issues we have discussed before continue to cook.

Europe

As expected, the troubles in Europe are starting to spin up again. After a quiet spell in the eye of the hurricane, multiple major issues are coming to the fore.

Britain continues to push to limit EU spending and powers, against the wishes of most other EU countries. The problem is becoming so acute, both within the EU and Britain itself, that there is talk again of Britain leaving the EU. While not an immediate concern, it does raise the issue of voluntary exits, as well as involuntary ones. Italy just hit a roadblock, with the unelected prime minister announcing he will resign shortly, and Italian (and Spanish) interest rates increased on the news. Political instability is back in the Mediterranean countries. In France, a storm is looming but hasn’t actually broken yet. And Europe as a whole is expected to be in recession or close through 2013.

Yes, inclement weather is rolling back in. The good news is that much of the institutional toolkit to deal with the next set of storms is now in place, which hopefully will limit the damage.

Overall, European economic weakness will continue to slow U.S. growth, through reduced exports there. This will not change in the next year or so at best, but it’s also unlikely (at least at this point) to get significantly worse. Overall, the situation is worth keeping an eye on but isn’t a significant economic worry from a U.S. standpoint.

Asia

China has weathered its leadership transition with no visible problems, and the economy appears to be on the mend, with rising retail sales and exports, as well as increasing housing prices—all positive signs. While I remain concerned, it appears that the economic model is continuing to work in the short term.

The concern in Asia is not economics but politics. Though territorial and resource disputes in the South and East China Seas between China and its neighbors have largely left the headlines, they haven’t gone away. The specifics don’t matter so much, but multiple clashes between nations have started to approach a military level, and China has taken no steps to back off. Indeed, new Chinese passports have included maps showing many of the disputed areas as Chinese territory, and full-page ads have been taken out in major U.S. newspapers pushing China’s claims. The newest headline appears on the front page of today’s Financial Times: “Philippines backs rearming of Japan.” This is a big step, and it highlights just how concerned other Asian nations are about Chinese expansion.

Political uncertainty in the region as a whole adds to supply-chain concerns for manufacturers and supports the re-shoring story for the U.S. That uncertainty doesn’t look to be going away and will probably continue to worsen thanks to China’s domestic troubles. One negative effect for the Chinese economy will be reduced foreign direct investment, particularly from Japan—another reason to be concerned about Chinese growth going forward.

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