World Economy Gives Investors Growth Scare as They Look to U.S.

http://www.bloomberg.com/news/2014-10-15/world-economy-gives-investors-growth-scare-as-eyes-focus-on-u-s-.html

The global economy faces its biggest test of confidence since the European sovereign debt crisis as investors fear it’s running out of engines.

Japan and the euro area are throwing up fresh signs of weakness by the day and emerging markets such as China are dragging instead of driving growth. The sense of tumult is being exacerbated by war in the Middle East, the standoff in Ukraine, street protests in Hong Kong and the spread of Ebola to Dallas.

The worry is that five years since the world limped out of recession, central banks have virtually exhausted their stimulus arsenals if inflation and activity keep fading. That leaves the hopes of financial markets riding on the U.S. to resume its historical role as a locomotive robust enough to pull up demand elsewhere.

“The global economy and the markets have a history of traumatic economic events,” said Paul Mortimer-Lee, chief economist for North America at BNP Paribas SA in New York. “Psychologically and physically they have not recovered fully and are anxious about a relapse.”

The doubts remained evident across financial markets today. European stocks fell for an eighth day in the longest rout since 2003, oil fell toward $80 a barrel and Treasuries rose. Bonds from Greece to Spain slid while the dollar strengthened.

Avoiding Commodities

A Bank of America Corp. survey of fund managers this week showed the lowest optimism in the outlooks for economic growth and inflation in two years, pushing them to increase their cash balances and avoid commodities.

European Epicenter

The epicenter of the economic worries is the euro area, where European Central Bank PresidentMario Draghi is trying to tackle the weakest inflation in almost five years as investors bet it will deteriorate further amid signs powerhouse Germany is now faltering.Having pulled the euro-area economy out of its debt panic in 2012, Draghi has sought to boost prices by cutting interest rates to record lows, issuing cheap loans to banks and laying the groundwork to begin buying private-sector assets this month.

That leaves purchases of government debt as the last option. While Draghi says he is open to quantitative easing if necessary, it would run into opposition from Germany. Governments throughout the bloc have yet to deliver the economic reforms and easier fiscal policy he would prefer to see first.

“Europe has now entered a more dangerous phase in their crisis,” said Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida. “They’ve got to do quantitative easing. They don’t have any choice because that’s the only game in town.”

Emerging Markets

Unlike five years ago when they proved strong enough to lift the world out of its slump, emerging markets are now stumbling, too. A property slump in China is pushing down the nation’s annual growth to what analysts project is the slowest pace since 1990, while Brazil is trying to escape the recession it entered in the first half of the year.

Some emerging markets are being sideswiped by subpar global growth as geopolitical tensions from the Ukraine conflict also weigh on investor confidence and threaten to sink Russia’s economy into a recession, Gustavo Reis, a New York-based economist at Bank of America Corp., said in a phone interview.

“We’re seeing an impact not only on the Russian economy, which is pretty visible, but also on European confidence indicators,” Reis said. “That is having an impact on the global economy.”

Oasis of Prosperity

The biggest reason for confidence that the storm will prove short lived are signs the U.S. is again a potential oasis of prosperity even as the foreign weakness and rising dollar draw the concern of Federal Reserve officials.

Grounds for optimism include the lowest unemployment rate in six years,a deleveraging of debt by companies and households and the likelihood cheaper energy and low bond yields will support consumer spending and business investment. 

The hopes of financial markets is riding on the U.S. to resume its historical role as a locomotive robust enough to pull up demand elsewhere.