Growth in this quarter must be high

THE last week or so has seen more gross domestic product ( GDP) growth figures for the second quarter trickling in. That quarter has been particularly interesting to include in market expectations despite that the entire financial market was expecting very poor figures.

In some countries where an economic downturn had set in earlier, first-quarter growth fell and are now under a so-called technical recession. Some economies even have to acknowledge that negative GDP growth was already a reality in the fourth quarter of last year.

In the United States, statistics show its GDP growth at - 31.7 percent. A comparable number with other countries is -9.2 percent — better, but still a horrible figure that historically represents a very large decline by American standards. The US economy has, by nature, a great degree of flexibility; it has seen steeper ups and downs in growth than the often more stable Europe. This time is partly different, however. I argue that the expected American economic rebound should happen quite quickly after this significant downturn, which must also be visible in the labor market.

Within two months, unemployment jumped from 3.5 to 14.7 percent, which, again, is really something one cannot imagine. The US labor market is incredibly important in assessing how quickly the world’s largest economy is recovering, partly because private consumption is such a powerful driving force there. I wouldn’t say investors and the stock market would be particularly surprised if the unemployment rate remains at around 10 percent for the rest of the year, but it could result in a few nervous investors at the start of the coming year, aware of that high rate.

The Federal Reserve is the inventor of quantitative monetary policy, and this monetary tool would not be changed for the benefit of investors. However, I do not expect low interest rates to kickstart the US economic recovery, which in themselves are a concern. Therefore, it becomes more interesting than usual to see which proposals offered during the country’s presidential election campaign period bring new economic growth initiatives, as well as promise a rapid reduction in unemployment. If there are few or no serious political ideas on handling this gigantic challenge, then it could reasonably create some nervousness on Wall Street.

The US has gradually become heavily indebted, but it looks worse for the chronic debt-ridden southern European countries, including France and Italy. Many countries experienced some economic decline in the first quarter, including America, but a country like France already had a deficit of 5.9 percent in the period, in addition to its negative growth in the fourth quarter last year. For Italy, it is exactly the same, but I see it as a different, but basically old structural downturn in the economy, which I do not expect to be reversed by the European Union aid package. Considering all these, I see no reason to change my assessment of southern Europe as an unattractive investment destination.

Emerging-markets countries are known to recover very quickly after economic crises, with the Philippines being one of the countries I consider to be among the most attractive. On the surface, one could say the decline in its GDP growth was 15.2 percent, though government debt is at 42 percent of GDP. That is correct, but that economic reserve has been partly reduced, as the debt share has probably risen to around 50 percent. Yes, it happens fast, and an emergingmarkets country cannot afford the same relative indebtedness that the US has, for example. However, it does not change the fact that I have the strongest trust in the prospects for renewed growth in many Far East countries, but even here, the growth explosion would be absent.