Investor optimism that�s created the recent market rally will be short-lived, according to analysts at this year�s CFA Vancouver forecast dinner.
A pessimistic view of the global economy from economist Gary Shilling of A. Gary Shilling and Co. included a serious recession in Europe, a hard landing in China and an economic downturn in the U.S.
Shilling said Europe�s economy will face a recession as severe as the one stemming from the 2008 global financial crisis, during which the region�s real GDP fell 5.5% from its peak to trough.
His forecast for an economic hard landing in China translates to economic growth in that country of between 5% and 6% this year.
�They�re suffering from slackening exports,� Shilling said, �and China�s economy is still led by exports, despite attempts to create a more domestic economy.�
While admittedly in the minority, Shilling still forecast a small recession in the U.S. this year that would be caused by reduced spending from consumers who he said still need to save and rebuild their household balance sheets.
David Fisher, executive vice-president at Pacific Investment Management Co. (PIMCO), expected global economic growth to be a relatively flat 1% to 1.5%.
The forecast from the firm, which manages more than $1.3 trillion in assets, is for U.S. economic growth of less than 1% this year and a recession in Europe of between 1% and 1.5%.
But unlike Shilling, Fisher doesn�t expect a hard landing in China. He predicted its economic growth at around 7% in 2012, which is still below an average growth rate forecast of 8%.
�Overall, in the rest of the emerging world, major economies will be growing in the 3% to 4% range,� Fisher said. �So overall, that suggests modest growth. Not a global recession, but relative to the 4%-plus growth rates we�ve seen over the last few years, it�s a pretty significant slowdown.�
Copper and other commodity prices face heavy downside risk
The continued slowdown in the Chinese economy will likely erode commodity prices this year.
Noted Fisher: �If our short-term forecast of weak global growth is correct, most commodity prices would come off. The possible exceptions would be oil and gold. Other financial commodities could see a spike in demand if there were excess risk aversion.�
Shilling argued that the markets for copper, other base metals and even agricultural commodities are already pricing in a global slowdown.
�In our portfolios, we�ve been short copper,� said Shilling. �I like copper on the downside, particularly because it goes into almost anything manufactured. It�s a very good indicator of global demand, and there isn�t a cartel on either side.�
Hanif Mamdani, head of alternative investments for RBC Global Asset Management, added that with the rise of exchange-traded funds (ETFs) focused on commodities like copper, prices might be artificially high due to investor rather than end-user demand.
�Many of these commodities trade 50% to 75% above marginal production costs,� said Mamdani. �To me, that represents a huge downside risk if the financial investors and institutional investment community that�s decided that commodities have to be a certain slice of their portfolio change their mind.�
Timing of government policy key to preserving growth
While Eurozone and North American governments struggle to address their deficits, each analyst said the timing of spending cuts will be crucial to preserving economic growth.
�In the long-run, a more efficient government and smaller tax burden in a country is a good thing. But timing is very important,� noted Mamdani.
�There are very bad times to affect a good strategy in the long run, namely in the midst of a recession or downturn. So I think we have to be tactical in how we address this long-term change.�
Shilling warned that the austerity measures being imposed on Greece are likely to turn the country�s recession into a depression.
�We have the same thing in the U.S. We have to do something with the deficit. We have a short-term deficit which is the result of a weak economy and big fiscal stimulus,� said Shilling. �But if you cut back dramatically now, you end up with a deep recession.���
