Growth Worries Sweep the Global—and US—Economies Today

01/14/2015 5:31 pm EST

Focus: MARKETS

Jim Jubak

Founder and Editor, JubakPicks.com

News that the World Bank cut its forecast for 2015 global economic growth yesterday rippled through the world’s economies, and MoneyShow’s Jim Jubak thinks these global growth worries are likely to rise even further next week when China reports its figures for annual GDP growth for 2014.

Where’s the growth?

The World Bank yesterday cut its forecast for 2015 global economic growth. The bank, which forecasts growth twice a year in its report on Global Economic Prospects, now projects that the world economy will grow by 3% in 2015 and 3.3% in 2016. That forecast is down from 3.4% for 2015 and 3.5% in 2016 in the World Bank’s June report.

On the downside, the bank cut its forecast for the EuroZone to 1.1% from 1.8% and projected that Russia would drop into recession with growth contracting by 2.9% in 2015. In June, the World Bank projected that Russia’s economy would expand by 1.5% in 2015.

The United States and South Asia were two of the few bright spots. The World Bank raised its forecast for US economic growth to 3.2% from an earlier 3%. The South Asian economies, a group that includes India, got a bump to 6.1% growth from the 5.9% projected in June.

The bank’s chief economist, Kaushik Basu, issued a warning about the unbalanced nature of global growth. “The global economy, he said, “is running on a single engine. It is only the US economy that is forging ahead in a global economy with so much uncertainty. We need several engines.”

Concerns about the power of that single US engine are on the upswing this morning as a result of a disappointing report on retail sales for December. The consensus among economists surveyed by Briefing.com expected a tiny increase of 0.1% in retail sales for the month. Instead, headline retail sales dropped 0.9% in the month. The increase in retail sales in November was revised to an increase of 0.4% from an originally reported 0.7%. Some of the December drop was a result of lower gasoline prices, sales at gasoline stations dropped 6.5% in December. But that clearly wasn’t the only problem since core retail sales—which exclude sales at car dealers, at gas stations, and at building materials and supply stores—fell 0.2% in December after a pickup of 0.5% in November.

Worries about global growth are likely to rise further next week when China reports its figures for annual GDP growth for 2014. Economists are expecting that China will miss its growth target—7.5% for 2014—for the year. That would be the first time that the country has missed its target since 1998. China’s growth rate hasn’t dropped below 7.5% since 1990. That year, the country faced international sanctions after the Tiananmen Square massacre. Even though China’s official GDP figures are widely regarded as overly optimistic manipulations, a drop in the official rate below the target will spook domestic and overseas investors because of the doubts it will raise about the government’s policy toward economic growth.

Stocks in Shanghai fell by 0.4% overnight, continuing the recent selloff and sending the market to its lowest level in 2015. After a huge rally in 2014 that took stocks to a four-year high, analysts have turned increasing negative on Chinese equities. On January 12, for example, Citigroup cut its rating to neutral from overweight. Overseas investors have turned into net sellers of Shanghai shares through the new Shanghai-Hong Kong exchange link. New accounts opened by Chinese retail investors have dropped by 38% from their December high. Eight out of 12 strategists surveyed by Bloomberg expect that the Shanghai index will end 2015 lower than current levels at a median estimate of 3,100.  The index closed at 3,222 overnight.

In US markets, the Standard & Poor’s 500 (SPX) stock index closed down 0.58% and the Dow Jones Industrial Average was off 1.06%.

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