Economists at theInternational Monetary Fund (
) are paid to worry. They have to soberly assess the various
currents and cross-currents buffeting the globaleconomy , making
their best guess about what lies ahead for the global economy. And
they're tasked with compiling and publishing their findings on a
regular basis, most recently in this
234-page report issued this past August
Think it's all about the never-ending crisis in Greece and its
neighbors? If you're pressed for time, then I'll jump straight to
theIMF 's key conclusion: "Even absent another European crisis, the
most advanced economies still face major brakes on growth. And the
risk of another crisis is still very much present and could well
affect advanced and emerging economies," notes the IMF in that
latest World Economic Outlook.
For U.S. investors, it's crucial to understand that Americans
don't live in a vacuum. Problems around the world canwash up on
U.S. shores quite suddenly, as every major U.S. company now has
extensive global operations. Stumbling economies elsewhere
couldmean a drop in demand for U.S. exports and even sharp layoffs
at the country's biggest employers.
With this in mind, I've compiled a guide to world's economic
danger spots. And I'm not talking about thePIIGS (Portugal,
Ireland, Italy, Greece and Spain). Those are only the most obvious
"at-risk" economies. Several others also hold major risk -- even if
they're staying out of the headlines right now.
What's on the mind of the IMF economists? The issues vary from
country to country, but include stunningly large budget
deficits,deflation , unfavorable demographics, a too-strongcurrency
, and weakening consumer demand.
Before things get better (and they will), they may gate a lot
worse over the next few years for some of these countries, so
portfolios with exposure to these economies mayunderperform the
Roughly two years ago, I laid out the sobering
challenges this country faces. A too-strong currency
remains as Japan's biggest challenge as years of
export-driven growth has led to a currency on steroids.
Consider this stat: the Japanese yen has rallied from 120
against the dollar five years ago to a recent 78. This
means that anything built in Japan for export, whether it's
sedan or locally-caught blue-fin tuna is now 35% more
expensive to produce.
Now Japan's leaders have to figure out how to boost the
country's competitiveness, a task made even more difficult
by a recent move to start ending the country's use of
nuclear power. Japan instead will have to rely on costly
imports of oil and natural gas, sapping cash from other
productive uses. Adding insult, Japan is rapidly aging, and
as many citizens retire, they are creating a fiscal drag on
the government as benefit spending surges.
A decision to cut spending in the face of a
staggeringdebt load seemed like a wise move in the U.K.,
but it was done at a time when the economy was on very
tenuous footing. As a result, sharply reduced government
spending has caused the U.K. economy to shrink 0.7% in the
second quarter of 2012, making the U.S. anemic 1.3% growth
rate look downright perky.
The deepening economic slump is leading for calls to
relax the current austerity measures, which has the
undesirable side-effect of keeping the U.K.'s budget
deficits quite large. Unemployment has risen from 5.0% at
the start of the global economic crisis to a recent 8.1%,
and concerns of a move toward 10% unemployment has renewed
memories from the 1970s, when similarly high levels of
unemployment led to riots in the street.
And the U.K. can't export its way out of this mess: The
country's industrial sector is largely uncompetitive, which
explains why the country has run trade deficits every year
since 1997. The country is wobbling now, but could easily
enter into a downward spiral with a few bad breaks..
The Indian government has made remarkable strides during
the past two decades, boosting literacy rates, expanding
access to clean water and other basic health needs, and
pushing millions of its citizens above the poverty line.
But years of steady economic growth have come at a cost.
India is choking on itself as too much economic activity is
taking place on a very-stressed infrastructure. Many farm
products rot as they remain stuck in warehouses, companies
are scrambling to build their own power plants to help keep
the lights on, and in some instance, these companies are
building their own roads and rail lines to be able to get
their goods past key bottlenecks.
But India's greatest problem may be a stubbornly high
population growth rate. While family sizes have been
quickly falling in countries like Brazil, Indian mothers
continue to have many more kids than they can afford to
raise, leading to a never-endingwave of job-seeking
migrants in to the countries' largest cities. According to
the IMF, India's population grew 1.4% in 2011 compared with
the previous year. Said another way, India's population
stood at 849 million in 1990, and is projected to reach
1.398 billion by 2025. By 2035, India's population is
expected to surpass China's, and the country's current
infrastructure problems appear likely to worsen.
Russia faces precisely the opposite problem as India:
Its population is imploding. In 1990, it had roughly the
same number of citizens as Brazil (150 million). But high
rates of suicide, death from alcoholism and small family
size means that Russia's population is likely to keep
falling. By 2025, the Russian population is likely to be
just 61% of Brazil's population, according to the United
Population deflation is just as nefarious as
populationinflation . Russia will be increasingly
hard-pressed to train the next generation of teachers,
railway conductors, assembly line workers, farmers, etc.
Chinese citizens have already taken note of the emerging
Russian vacuum, recently migrating into Siberia to take
over fallow farms. The city of Vladivostock in Eastern
Russia is now said to have as many Chinese speakers as
Russian speakers. This could eventually set the stage for a
violent reaction as Russia remains as a highly
The Argentinean economy appeared to have a peaked around
1900 when the country was a leading exporter of beef,
minerals and many manufactured goods. Decade after decade
of bad fiscal policy led to a long slow decline, which only
reversed a decade ago when Argentina sharply devalued its
The last decade's gains, may not last though. Argentina
suffers from a range of ills, from an inefficient energy
sector, crippling tax schemes in key industries,
persistently high inflation and a workforce that is
increasingly unable to compete with the likes of Brazil,
Chile and Colombia.
Many middle-class Argentineans have had enough, packing
up for places like Miami, Santiago Chile, London and
elsewhere. You won'tspot a large population drop as these
folks emigrate, as citizens from Paraguay, Bolivia and
other neighboring poorer states take their place. Yet
Argentina is trading a highly-skilled middle class for a
fairly unskilled group of immigrants. And in a global
economy, this "brain drain" sets the stage for an even less
competitive economy in the years ahead.
6. Egypt and Pakistan
These countries are in the news for geo-political
tensions. You don't hear much about their economies,
largely because each is the beneficiary of massive amounts
of foreign aid that helps keep them out of the economic
crisis zone. Yet chances are rising that this aid will be
sharply reduced or even eliminated as their respective
governments increasingly choose to pursue independent
geopolitical strategies that diverge from the stated goals
and wishes of key aid providers.
The negative effects on Egypt could be especially
severe. Under former President Hosni Mubarak, Egypt had
reasonably competitive banking and telecom sectors and a
very strong tourism sector. Nowadays, with many of the
country's leading executives residing elsewhere (due to
their former close affiliations with President Mubarak),
the business class in Egypt is under pressure. And tourism,
a key source of foreignearnings , has virtually dried up
while global travelers steer clear of the current
socio-political tensions. Egypt increasingly looks in need
of even more foreign aid than it currently gets, though
thatoption may not be available to the government.
Action to Take -->
Unless these countries address long-term endemic problems,
theirfutures look set to darken further.
You should keep an eye on each of these countries, because as I
said earlier, their problems could affect the global economy -- and
in turn your own portfolio.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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