Growth Expectations Erode But Don't Dissolve

6/18/2012


"Uncertainty" is an expensive word.

Pockets of economic weakness in the U.S., slowing growth in emerging markets, and the potential for an outright disaster in Europe have sapped the confidence of both individuals and businesses. In part, that uncertainty manifests in the form of lackluster economic-growth estimates, as shown below. In June, the Blue Chip Economic Indicators consensus projected U.S. gross domestic product would rise 2.1% this year and 2.4% in 2013.

GROWTH ESTIMATES EDGING LOWER

Growth estimates for emerging economies in 2012 and 2013 tend to be higher than estimates for mature economies. Estimates for most, though not all, of the economies listed below have declined since the start of the year.

------------------------------ Economic Growth ------------------------------
---------------------- Estimates ----------------------
------- Actual -------
--------- 2012 ---------
--------- 2013 ---------
Country Or Region
2010
(%)
2011
(%)
As Of
January
(%)
As Of
June
(%)
As Of
January
(%)
As Of
June
(%)
Mature economies
Canada
3.2
2.5
2.1
2.1
2.5
2.3
Euro zone
1.9
1.5
(0.4)
(0.5)
1.0
0.7
Japan
4.4
(0.7)
2.0
2.2
1.9
1.7
United Kingdom
1.8
0.7
0.6
0.3
1.8
1.6
United States
3.0
1.7
2.2
2.1
2.6
2.4
Emerging economies
Brazil
7.5
2.9
3.4
2.8
4.5
4.4
China
10.4
9.2
8.0
8.1
8.7
8.4
India
8.5
7.0
7.2
6.7
8.0
7.4
Mexico
5.4
3.9
3.3
3.7
3.9
3.7
Russia
4.3
4.3
3.6
3.7
4.0
3.8
Source: Blue Chip Economic Indicators.

Expectations for many foreign economies have eroded since the start of this year. GDP targets for the euro zone (comprised of 17 countries that use the euro) and the United Kingdom already looked weak, and those economies can ill afford more bad news. With Greece crumbling, Spain stumbling, and Germany grumbling, even European Union action that addresses near-term solvency problems probably won't ease long-term concerns.

Euro zone GDP was flat in the March quarter and has not grown more than 0.1% on an annualized basis since the first quarter of 2011. Six European countries have already suffered at least two consecutive quarters of economic shrinkage, and the consensus projects that the entire euro zone economy will contract this year.

Emerging economies, particularly those in Asia, seem much better off. But even these growth engines have slowed. Brazil, China, India, and Russia are all expected to post lower GDP growth this year than they did in 2010 or 2011. Those emerging nations have enough momentum to weather a global storm. But any slowdowns they suffer will reverberate in mature economies like the U.S., Europe, and Japan.

According to the Bureau of Economic Analysis, foreign earnings accounted for 40% to 45% of total U.S. corporate profits in 2008 and 2009, up from roughly 20% in the 1980s. Given the pace of globalization — and the rapid expansion of emerging markets as consumer powers — that percentage is likely to keep rising over time.

Shrewd investors will keep an eye overseas in coming months, with particular focus on Europe. Temper your sales- and profit-growth expectations for companies dependent on foreign sales, but don't forget the world economy is expected to expand 3.3% this year.

Bottom line: A combination of 2.0% to 2.5% economic growth in the U.S., modest contraction in Europe, and a world growth rate in the neighborhood of 3% should be enough to keep U.S. corporate profits on the rise.


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