Archive for April, 2012
S&P have downgraded Spain. The UK is technically back in recession. Employment growth in the US, which had been cracking along so nicely, seems to have stalled. The manufacturing sector in China may still be weak.
There is plenty to be gloomy about. Might we be due a rerun of Q2 2010, when the Greek crisis saw the FTSE 100 fall by 13.4%? Or Q3 last year, where stagnation in the US combined with further deterioration in Europe to knock the index back 13.7%? Some people think this is inevitably the case: that history will repeat itself, and that we remain firmly set on the way to some sort of global economic doomsday.
Parallels with recent history, however, are not quite so straightforward as they may appear.
In April of 2010, Eurostat calculated the previous year’s budget deficit for Greece at over 15%, bringing its debt-to-GDP ratio up to almost 130%. The government asked for emergency funds, S&P downgraded Greece from BBB+ to BB+ (junk) and the country’s ten year bond yield shot up to 12% (the market was effectively closed).
This month, Eurostat data for Spain showed a 2011 budget deficit of 8.5%, bringing debt to GDP up to 68.5%. (That’s over 17% lower than here in the UK.) S&P’s downgrade was a meagre one “notch”, from A- to BBB+, at which level the country remains investment grade. The government has explicitly stated that it does not need and is not seeking a bailout. And Spain raised two and ten year funding only last week (at 3.5% and 5.7% respectively).
Now Q1 GDP data for Spain is out on Monday, and there’s no doubt that the bond market has the country in its sights. But the point is that Spain’s financial situation in 2012 is different from – and better than – that of Greece two years earlier.
What about the US? Well, of course it is possible for the pace of expansion to slacken as it did a year ago. But what really set the cat among the pigeons over the summer was that GDP growth was revised down across the whole period of recovery (one of the worst revisions being to Q1 2011: initially estimated at 1.8% annualised this was slashed to an emaciated 0.4%). This reflected a change in methodology – specifically, a new procedure for seasonally adjusting petroleum imports, as one of those responsible put it at the time. A cynic might hold that such an adjustment is less likely in a presidential election year.
We last looked at worries over China a month ago, observing that the indicators scaring the market are in a much better state than they were during the 2008-9 recession.
Altogether, then, while there are always problems around, those we face today do not seem quite so severe as those which triggered the panics of the last couple of years. Selling in May this time might not turn out to be the surefire money-saver it was in 2010 and 2011.
“We are seeing light recovery blowing in a spring wind.”
That was how the IMF’s Christine Lagarde – clearly more of a poet than her predecessor – described the Fund’s latest World Economic Outlook report, out this week. The big news was that its growth forecasts have been revised – gasp! – up.
Of course, the report is laden with the usual caveats, and understandably so. After all, the commentariat tells us solemnly that when it comes to bond yields, 6% is the new 7%, and that borrowing in Spain has thus become unaffordable. (This is moot. But having failed to bankrupt a country with no deficit problem – Italy – perhaps the market will succeed in respect of a country with no debt problem instead.)
Nonetheless, seeing an important economic forecast revised up is encouraging. Unsurprisingly, given the strong data, one of the key revisions was in the case of the US, where projected growth of 2.1% for this year is 0.3% higher than the IMF was forecasting in January. And that brings us on to another type of prediction.
Amid the gloom and woe of the second half last year, Wall Street analysts slashed their expectations for stock market earnings. At one point, reported earnings for the season that has just begun were expected to fall.
The consensus as reports began was less bearish, with average EPS growth across the S&P 500 anticipated to reach about 1%. But with a quarter of the index’s constituent companies having announced their results, the outturn so far is running at 7.2% (6.2% excluding financials – some of the big banks have been doing especially well).
Over 80% of reports have beaten expectations. Forecast earnings growth for the index as a whole this quarter has now risen to over 3%.
Mindless optimism is of no more use to the careful investor than the hysterical pessimism that has dominated of late. But it is surely not imprudent to observe that, even with renewed panic over Europe, proper gloom is becoming harder to sustain.