Slowdown in Global Economy Could Be Looming; Don’t Pay Too Much Attention to the Optimism
We are told that the global economy is smooth sailing these days and that we are nowhere close to seeing an economic slowdown on a global level. Sadly, this optimism could be very short-lived. A global economic slowdown could be looming.
Those who argue that the global economy is doing just fine will say things like, “Oh, just look at Caterpillar Inc.‘s (NYSE:CAT) earnings. If there wasn’t global growth, how come the global construction machinery manufacturer is doing great?”
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Caterpillar reported its financial results for the first quarter of 2018. Its first-quarter sales and revenues soared 31% year-over-year, and the company provided an upbeat outlook for 2018. (Source: “Caterpillar Inc. 1Q 2018 Quarterly Financial Results,” Caterpillar Inc., April 24, 2018.)
Certainly, Caterpillar reporting a solid increase in revenue and profits suggests that there’s something positive happening in the global economy. This company is very reliant on global growth. If there’s a global economic slowdown, Caterpillar suffers.
But remember, correlation is not causation.
Major Economic Hubs Say the Global Economy Could Struggle
It’s important to look at major economic hubs in the global economy to assess what’s happening. Caterpillar’s financial situation gets better because of the global economy, not the other way around.
Unfortunately, there are still a lot of risks that could derail global growth.
Understand that China, the second-biggest economy in the world, could be headed toward an economic slowdown. It’s not there yet, but its growth rate is diminishing.
In the first quarter of 2018, the country’s gross domestic product (GDP) grew by 6.8%. (Source: “China says its economy grew 6.8% in the first quarter of 2018, topping expectations,” CNBC, April 16, 2018.)
Mind you, 6.8% may look like stellar growth for the U.S., but, for China, it’s embarrassing. It wasn’t too long ago that the Chinese economy was growing at 10%.
The People’s Bank of China (PBOC) is concerned about the financial sector of the country. Why? Debt in China has ballooned over the years, and there are concerns that there could be a financial crisis in the country. It could drag the economic growth rate much lower.
Just recently, the PBOC cut reserve requirement at the banks, due to liquidity concerns in the financial sector. (Source: “PBOC Cuts Reserve Ratio in Tweak to Steady China Bank Liquidity,” Bloomberg, April 17, 2018.)
If China slows down, it could drag the global economy lower.
Going beyond China, troubles in the eurozone are also brewing.
In Germany, business sentiment is crashing. The ifo Business Climate Index for Germany fell in April, after falling in March. The index has been declining since December 2017. It hints that an economic slowdown could be nearing for the biggest economic powerhouse in the eurozone. (Source: “ifo Business Climate Index Falls Again,” ifo Institute, April 24, 2018.)
Mind you, German businesses aren’t too optimistic either. Their expectations are at their lowest level since August 2016.
Why Worry About the Global Economy?
Dear reader, it’s important to keep a close eye on what’s happening in the global economy. A global economic slowdown could also be very bad news for the U.S. economy.
Don’t forget, the U.S. isn’t an isolated nation. If global growth gets hurt, U.S. growth rates could tumble as well.
Also, don’t forget that a lot of American companies have a global footprint. Their revenues and profitability could tumble due to a global economic slowdown, and so could their stock prices.
A global economic slowdown could be likely sooner rather than later, and investors must know the risks associated with it.
