Growth and imbalance – EconomyMorning


It is now established that the growth, which we have been announcing for several months, is accelerating in the world.

Europe is lagging behind China and the United States due to a still worrying health situation, but everything indicates that the second half of the year will put an end to this difference. This global growth is good news after the unprecedented shock caused by the coronavirus pandemic. However, it will generate imbalances which we will have to take into account in our allocations.

Growth is the sum of different factors such as consumption, production, investment, trade or real estate. Some of these factors are linked, leading to a virtuous circle of activity. Consumption drives production which encourages companies to invest. Growth coordinated with other countries also promotes trade. But this virtuous circle can also switch to a more difficult path, if one of these parameters fails.. Thus, if the production apparatus of a country is insufficient, consumption can no longer be satisfied at the national level and trade imbalances appear. Or, if real estate stocks are too low to meet demand, the result is a rise in prices which will ultimately weigh on inflation and interest rates.

This is what America seems to be going through today. The United States does not have the necessary manufacturing capacity to meet demand. Very low inventory levels do not provide room for maneuver. This weakness of the industry inevitably leads to an increase in the trade deficit, in particular with the Chinese “enemy”. As such, President Trump has totally failed in his attempt to rebalance trade with China.

The current paradox with the United States stems from a vigorous resumption of growth which highlights the recurring structural problem of a lack of industrial capacity, which generates a trade deficit. This will not facilitate bilateral relations with China. If Joe Biden’s stimulus package is passed, it will only accentuate this phenomenon in the short term. The US locomotive is going full steam ahead and this is great news for global business. Be careful, however, of the side effects it can cause.

China therefore benefits from the growth of its rival. However, we note a stabilization of the main economic aggregates after months of strong increases. This trend is a natural phenomenon, the recovery being always stronger at the beginning, but it does not call into question the global activity. Too strong growth is also not desirable because it turns into overheating that must then be controlled.

Europe still lags behind these two engines due to a slower vaccination campaign. But the direction is the same. Growth is moreover already quite resilient despite the first quarter re-adjustments (for example growth in France which is 0.4% in the first quarter against 0 expected). The abundant savings of households and businesses point to a vigorous recovery in the second half of the year.

The financial markets are today at a level where a lot of good news is now integrated and where unpleasant surprises are sanctioned. We can see it in the sequence of publication of the quarterly results of the companies. Most of the time, profits are above estimates (or even much higher, for example for the big American technology companies), but this does not always lead to an identical reaction of the stock price, with investors estimating that valuations are already high. This translates into a more hesitant market which could blow in the short term. Any significant downturn in quality companies, however, will be a buying opportunity in our view. We are adopting a slightly more cautious approach in the short term, while remaining aware that to date the equity market is the one that clearly offers the most interesting compensation prospects.