Growing concerns about a global slowdown, particularly in Asia, have set the stage for a sobering fall for North American equity markets, which rode a wave of optimism through the summer.
Markets fell Monday as the World Bank scaled back its growth forecast for China and the rest of the emerging economies of East Asia.
While the bank calls for China's GDP to grow 7.7 per cent in 2012 – a figure leaps and bounds beyond developed Western economies – it had forecast an 8.2 per cent growth rate in May. Chinese GDP grew 10.4 per cent in 2010 and 9.3 per cent in 2011, the World Bank said.
"China's slowdown this year has been significant, and some fear it could still accelerate," the World Bank wrote in its East Asia and Pacific Data Monitor.
The culprit, the World Bank says, is "lacklustre recovery in the United States and recession in Europe," as countries in the region have to rely on domestic demand, rather than export growth, to fuel their economies.
The World Bank said that with the exception of Vietnam and China, which posted only 1 per cent year-over-year in July, all of the other major economies in the region saw a decline in exports. This was, the banks said, "a sharp change from the 15-20 per cent export growth rates recorded in 2011."
The bank still feels confident enough to forecast a re-acceleration in 2013, with Chinese GDP growth ticking up to 8.1 per cent in 2013. (After U.S. markets closed Monday, the International Monetary Fund also cut its China growth forecast to a similar 7.8 per cent for 2012 and 8.2 per cent in 2013.)
Still, a slowing China is bad news for a Canada that's "vulnerable to a further slowdown," as BMO Nesbitt Burns Inc. chief economist Sherry Cooper noted Friday, in comments published before the World bank forecast was issued.
In addition to risks from "an overvalued currency, tighter credit conditions and the prospect of higher interest rates," Ms. Cooper said, "commodity demand might weaken further as growth prospects in China, India and Brazil have dimmed and Europe is still mired in austerity induced recession and debt overload."
"The TSX has meaningfully underperformed bourses in much of the rest of the world, which might be foreshadowing these risks of weaker-than-expected activity," she said.
The major North American equity indexes fell Monday in light trading, with the Standard & Poor's 500 down 0.3 per cent and the Dow Jones Industrial Average falling 0.2 per cent. (The Toronto Stock Exchange was closed for the Thanksgiving holiday.)
The declines represented a step back, as U.S. equities set five-year highs in recent days as a number of reports showed a surprisingly resilient economy. Friday's solid U.S. jobs report, for example, was blamed for a retreat in gold prices over the last two trading sessions.
Even as stock rose in recent weeks, however, a number of multinationals like FedEx Corp. and Caterpillar Inc. issued profit warnings linked to a slowing global economy. The U.S. third-quarter earnings season, which kicks off on Tuesday, with Alcoa Inc. reporting, is expected to the first year-over-year decline in profits for the S&P 500 since 2009.
"I certainly don't think the market's going to see another run like we've seen because it's running into significant headwinds," said Nariman Behravesh, chief economist for IHS. "We're not headed for a double-dip recession anywhere except for Europe, but we're looking at fairly weak growth in Asia and the U.S. is stuck in second gear."
Mr. Behravesh says the main issue in the U.S., beyond a "volatile" earnings season from potentially disappointing results, is a "window of extreme uncertainty." The country's "fiscal cliff" – another looming budget showdown as a number of taxes and spending choices face reauthorization – as well as the continuing European troubles and the "wild card" of further instability in the Middle East.
Market-watchers also took note Monday of a meeting of euro zone finance ministers, who planned to discuss woes in Greece and Spain while launching the region's new European Stability Mechanism.