Future: Where we may be going in 2013
What is the future of the economy?
Hello everyone. Welcome back. In this third and final video, we’ll consider the future of the economy. Let’s talk about the most important things to keep an eye on for the remainder of this year. What we’ll want to watch is the Feds exit and its impact on the financial markets, China’s economy – where does the slowing stabilize, European economy remains in recession, fiscal policy and partisan squabbling, and Japan’s great experiment. One thing everyone can agree on is the Federal Reserves quantitative easing program has given borrowers some incredibly attractive interest rates on their loans. Bunch of the housing recovery could perhaps be tied to the fact that people could afford more home for their dollars due to low mortgage rates. However, if this is reversing it could potentially become a headwind to consumers making large purchases.
For instance, we witnessed the largest monthly increase of mortgage rates in 30 years in June as the average rate on the 30 year fixed mortgage rate leaped to nearly 4.5% from under 3.5%. For now, interest rates are still very low and only one component of purchasing decisions. Likewise, savers would benefit greatly from more attractive interest rates. For years, China has notched stellar double digit economic growth; however, with new leadership in place and fears that China has overextended itself by fueling growth by borrowing to build unnecessary infrastructure, growth is now slowing. China’s economy grew 7.7% of the first quarter of this year and is expected to now notch growth of less than 8% for the entire year. As a result, China’s stock market has lost value. China is focusing on creating a more sustainable economic growth through consumer spending, but that will be a tough transition that could take many, many years.
Europe is still a mess with the overall Eurozone having negative economic growth. Unemployment, especially among the youth, is at unfathomably high levels. For examples, in Spain 56% of the youth are unemployed and almost 27% of the entire country is unemployed. The entire Eurozone currently has 12.2% of overall unemployment and 24.4% for the youth. The European Central Bank stepped in to support the economy promising to do whatever it takes. For now, that did provide a back stop, at least for financial markets. Bond yields on government debt remained at reasonable levels and a crisis appears to be contained at this point.
While the Federal Reserve has been steadfast in its expansionarian supportive stance, the same cannot be said of the fiscal side of government. Indeed, fiscal policy has become much tighter this year despite this reality and its drag on economic growth. Much work remains before the US government is on a healthier fiscal trajectory. The red bars in the graph illustrate the depth of fiscal deficits following the ’08 crisis. Receipts in green fell and expenditures in blue rose. Fortunately, the gap is closing. After peaking at over 10% of economic output, the US deficit is expected to drop 4% this year. The forecasted deficit of $642 billion will be the first below $1 trillion since the financial crisis began. For the time being, pressure is off Congress due to favorable receipts and expenditures of late. The fiscal debate, along with typical political fireworks, will renew this fall.
Japan has embarked on an aggressive program to escape deflation and kickstart economic growth. The three-part plan involves aggressive monetary expansion, massive fiscal spending, and structural reforms. A week Yen, higher inflation, and faster economic growth are the goals. As for the likelihood of success, the jury is still out. While some have doubts, some positive developments have already been seen. Of course, we want to focus on the positive aspects of the economic. The housing market has improved, auto sales are strong, and inflation is in check. We continue to study the market daily.
As always, if you have any questions or would like to discuss these issues, please do not hesitate to contact us. Just a reminder, these are our opinions and make sure you talk to your financial advisor before you implement anything based on what we discussed today. For the benefit of our existing clients, please remember, we only accept a limited number of new clients each year. We want to make sure it’s an ideal fit and we can add value to their current planning, because we really are looking for clients for the long term. Who do you know that would benefit from a proactive team that is transparent and that sits on the same side of the table as their client? We put your interests ahead of ours. Thank you for joining us and, as always, please do not hesitate to contact us with any questions you may have. Thank you.