Happy 10-year anniversary to the Global Financial Crisis! Just a decade ago, some of the world’s largest and most revered financial institutions, along with the modern financial system itself, were left staring into the abyss. Several events, beginning with the fire sale of Bear Stearns and failure of Lehman Brothers, quickly transitioned into a bailout of AIG, conservatorship of Fannie Mae and Freddie Mac, multiple emergency relief programs, and forced marriages of several global investment and commercial banks. The series of events would eventually translate into one of the most painful economic recessions on record.
And yet, as grave as things appeared in September 2008 and during the months that followed, the global economy just 10 years later finds itself in the midst of one of the longest economic expansions in the modern era. But as much as there is a great deal of positive news to go around as the current economic expansion grinds on, nearly all global economies face headwinds of some kind in the near term.
At the head of the pack, the U.S. economy has continued to feel the shot of adrenaline provided by early 2018 tax cuts and fiscal stimulus, recording 4.2% growth in the second quarter and an estimated 3.6% increase in the third quarter, which would be the highest two-quarter clip in nearly four years. Unemployment, which was hovering near the 10% mark during the depth of the financial crisis, is at 3.7%. And wage growth, which has been anemic throughout the recovery period, has shown some signs of life recently with gains of approximately 4.7% over the last year. U.S. inflation remains subdued with a 2.7% increase during the quarter; prices were held in check with a slowdown in fuel and housing costs. Core inflation, which excludes food and energy, grew at a 2.2% rate during August.
Tempering the enthusiasm, however, most market observers acknowledge that the stoked growth in the U.S. is unlikely sustainable, due to demographic trends (aging population, fewer new job entrants), uncertainty around the full impact of tariffs with China and other trading partners, and an unsettled political environment.
Looking abroad, global growth has continued to show resiliency, though moving at a slower pace than earlier this year. The Global Purchasing Managers’ Index (PMI), which provides a survey-based reflection of the economic health of the manufacturing and service sectors, continued to offer encouraging readings across much of the developed and emerging world throughout the third quarter. However, the steady rise in U.S. interest rates and U.S. dollar appreciation have begun to create some headaches for many parts of the world, particularly in the form of higher interest costs for emerging market countries with significant U.S. dollar-based debt burdens. Within the euro zone, investors are trying to balance the health of the PMI, lower unemployment figures, and stable inflation with headwinds such as ascendant populism (e.g., Italy), declining net export and trade activity, and stalling progress on Brexit negotiations (with a rapidly approaching deadline).
In Japan, corporate earnings, export activity, and business sentiment remain relatively strong. Meanwhile, a tight labor market (a 2.4% jobless rate as of August) has yet to translate into higher wages and private consumption has remained weak, though the latter could see a bump in advance of a planned sales tax hike (to 10%) in October 2019 along with other fiscal reforms. And in China, President Xi Jinping’s national team of economists continues to focus efforts on deleveraging (non-financial corporate debt is estimated at 164% of GDP, according to the Bank of International Settlements) and structural reforms while balancing the need for policy stimulus, likely in the form of more infrastructure investment, to counteract the impact of U.S. tariffs that have yet to take full effect.
With noted exceptions, we remain cautiously optimistic regarding the resilient global growth that has been exhibited by both the U.S. and foreign economies over the most recent quarter and year-to-date. And despite markets in both financial and real assets continuing to feel extended, such cycles are born without an assigned expiration date.
Nevertheless, we are also realists and acknowledge that all good things must end, which is why we continue to encourage investors to maintain a long-term perspective and prudent asset allocation with appropriate levels of diversification.
