Mixed Landscape for Global Economy Warrants Caution

By George Leong

The stock market is setting record after record and there appears to be nothing in its way. Yet as many of you know from reading these pages, while I continue to enjoy the rally, I am also preaching caution.

The Organization for Economic Cooperation and Development (OECD) came out with its semi-annual Economic Outlook report, and it has painted a mixed landscape for the global economy. The findings are really not a surprise, but they do seem to be things the stock market has ignored. I mean, why is the Nikkei up 70% over the past six months?

Sometime down the road, there needs to be some reasoning when looking at the current momentum in the stock market. I still think the stock market is moving too high too fast.

The OECD suggests the recession that has gripped Europe is a threat to the global economy. (Source: “Global economy advancing but pace of recovery varies, says OECD Economic Outlook,” Organization of Economic Cooperation and Development web site, May 29, 2013.)

The eurozone economy is estimated to contract 0.6% this year, followed by a 1.1% rebound in 2014, according to the OECD. My feeling is that the estimate for 2014 might be overly optimistic, as the region has a lot of work ahead of it and could be headed for another disappointment.

Gross domestic product (GDP) growth in the U.S. is estimated to rise 1.9% this year and 2.8% in 2014, according to the OECD. That’s fine, but it’s nowhere near the levels we need to drive significant jobs growth.

Crossing the Pacific, Japan’s economy is estimated to rise 1.6% this year and falter to 1.4% in 2014. Of course, much of this could be attributed to the massive stimulus in Japan; but even so, this is not exactly stellar growth that supports the rise of the Japanese stocks. And you still have the significant national debt added to the country’s burgeoning balance sheet.

China is estimated to show growth that will continue to far overshadow that of Japan and many parts of the global economy. The OECD estimates China will expand its economy 7.8% this year, followed by 8.4% in 2014. The growth will, of course, also be dependent on Europe.

The OECD report also suggests to governments that “urgent action must be taken to reduce unemployment, which has risen to dangerous levels in many countries.” (Source: Ibid.) Trust me when I say that this is not an understatement. The problem is the massive unemployment in the eurozone, estimated at 12.1% this year and 12.3% in 2014: this is a situation that is not getting better and will hinder the global economy.

Two of the eurozone countries, Spain and Greece, have a dismal jobs picture. The OECD estimates Spain and Greece will report an unemployment rate of 27.3% and 27.8%, respectively, this year, edging higher to 28% for both countries in 2014. America doesn’t look that bad in comparison, with our unemployment rate estimated at 7.5% and 7.0%, respectively, in 2013 and 2014. The reality is that unless jobs are created, the global economy will suffer.

“The global economy is strengthening gradually, but the upturn remains weak and uneven,” commented OECD Secretary-General Angel Gurria in the report. (Source: Ibid.)

And an interesting comment was the OECD’s assertion that the “future withdrawal of exceptional monetary policy measures could lead to instability in financial markets.” (Source: Ibid.)

In other words, ride the current stock market gains, but also be careful and make sure you take some profits off the table and have an exit strategy in place as the easing policies are reined in—because they will negatively impact the global economy.

This article  Mixed Landscape for Global Economy Warrants Caution was originally published at Investment Contrarians