When we look at how the economy is doing our focus is usually either on our city, county, state, or the country as a whole. However, as global trade has expanded in recent decades, our overall wellbeing is increasingly being determined by overseas developments.
There are several reasons why the global economy should be important for us. International trade has become an increasing contributor to our overall economy. Clearly there are winners and losers in certain industries when trade expands. However, more employment is typically created from expanded trade compared to jobs lost in affected industries. The ports of San Pedro and Long Beach are important drivers for our local economy.
For the investor, overseas activities from American companies are resulting in an increasing share of overall profits. For many companies foreign sales may constitute 50 percent or more of profits. In addition investing directly in countries overseas is a well-recognized technique to improve diversification.
Last week the World Bank provided an outlook for the global economy for this year. Its forecast showed global growth improving to 3.2 percent in 2014 from 2.4 percent in 2013. This improvement comes from developed countries growth increasing to 2.2 percent from 1.3 percent last year, while developing countries will grow at 5.3 percent in 2014 versus 4.8 percent in 2013.
The biggest change for developed countries will be Europe finally starting to show growth again, after its long recession. This growth will still be modest, only expected to be 1.1 percent, but a major improvement from -.4 percent growth last year. The other big contributor for developed countries is the U.S., which expects to see growth improve to 2.8 percent this year versus 1.8 percent in 2013.
Among developing countries the fastest growth continues to be in Asia, notably China and India. Africa, south of the Sahara, is the next region of the world with the fastest expected growth. In Latin America Mexico is expected to show the most improvement with growth expected to accelerate from 1.4 percent last year to 3.4 percent in 2014.
Some may start to think about how accurate are these forecasts for various countries. Obviously, over the course of a year there will be unexpected developments throughout the world. The key factors would be whether these changes are occurring in the largest countries, or in smaller ones.
If the economies of Europe, the U.S., and China perform as expected there will likely not be major changes to the global growth forecasts. Wars in smaller countries, such as Syria, have little impact on global growth unless the conflict spreads to other larger countries.
The two risk factors that have negatively impacted the global economy the most in recent decades are oil shocks and a financial crisis. With oil production growing in the U.S. the likelihood of a major oil shock does not appear to be too significant. In recent years there has been a concern of the possibility of a major financial crisis in Europe, but those fears are significantly less today.
There will certainly be some unexpected developments in the world this year, such as natural disasters. However, it is doubtful that any of them will serious enough to cause the global economy to grow less than it did in 2013.
An improving global economy would normally be expected to be good for the stock market. I believe much of this expected improvement in the economy for 2014 already occurred in the U.S. stock market last year, given the 30 percent gains. This is not to say that our market can’t go higher, but future gains will likely be more muted.
Better potential exists in international markets, especially in developing regions where faster growth is occurring. However, these markets come with greater risk and someone should not invest a disproportionate amount of their assets in these countries. In essence, the longer your time horizon is the more suitable emerging markets become.
