Greek relief for now, but what about the US?
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Shane Oliver is the head of investment strategy at AMP Capital.
The Greek election has provided some relief for global investors with the "pro-bailout" New Democracy party prevailing over radical left-wing Syriza, and likely to form a coalition government.
As such, the prospect of an imminent Greek default and a disorderly exit from the euro spreading contagion across Europe has substantially reduced, at least for now.
Of course, Greece is likely to continue to be a source of volatility - not only is it a long way behind in terms of its bailout agreement, which will have to be renegotiated anyway, but its population is also very divided.
More broadly, Europe's problems go well beyond Greece, encompassing Spain, Italy and maybe France.
The 28-29 June European Union leaders' summit will be looked to for clear signs Europe is heading down a more sustainable path.
This would involve less austerity and some sharing of risks (maybe via a redemption fund that gradually replaces national debt above 60 per cent of GDP with eurozone-wide debt) as a trade-off for a banking and fiscal union, along with economic reforms and more support from the European Central Bank.
However, while the focus has recently been on Europe, the US economy shouldn't be ignored. After all, it's worth noting that the 15 per cent sharemarket correction of 2010, and the 20 per cent correction of 2011, both had their origins in Europe and Greece, but they morphed into concerns about the US.
At the same time, America's budget deficit and overall level of public debt is higher than that of Europe. Whatever happened to America's sovereign credit rating downgrade and the worries around that?
There are two key issues of concern for the US:
- the recent flow of economic data has been softer and it faces a "fiscal cliff" from year-end as various stimulus measures and budget savings kick in on 1 January next year. This may result in a big contraction in America's budget deficit and a hit to growth.
- the US economic cycle. Reflecting post financial crisis caution, particularly on the part of the US corporate sector, the US economic recovery since 2009 has been anaemic and fragile, subject to periodic setbacks and fears of a "double dip" back into recession.
These soft patches were evident in both mid 2010 and mid 2011, and the economy appears to be going through another soft patch this year.
From the December quarter last year until about two months ago, US economic data surprised on the upside, but recently it has started to surprise on the downside again:
- Retail sales have been soft for the last few months,
- Consumer sentiment has been adversely affected by bad news out of Europe and sharemarket falls,
- Labour market indicators, including non-farm payrolls, have shown a slowdown in the rate of growth, and
- While the national ISM manufacturing conditions indicator has held up reasonably well, regional surveys have softened and these sometimes lead the national survey.