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Why scouring the globe for growth is foolish

The world's major developed countries and some of the larger emerging economies are facing a broad slowdown that threatens the still fragile global recovery, prompting investors to widen their search for pockets of growth.

Signs of renewed weakness have been cropping up across the developed landscape, as officials revise overoptimistic growth forecasts and inflation falls, in some cases to dangerously low levels. The Bank of Canada recently trimmed its economic outlook to 1.6 per cent for this year and 2.3 per cent next year, while removing its bias toward higher interest rates.

The latest IMF forecast pegs U.S. growth at a similarly anemic 1.6 per cent this year and 2.6 per cent in 2014. Amid data ranging from disappointing to marginally improved on manufacturing, employment, housing and trade and further concerns about Washington's political gridlock, it's no surprise that the Federal Reserve has put any plans to reduce its massive monetary easing on the back-burner. Yet as several perspicacious analysts have observed, despite having launched the world's most aggressive monetary stimulus program, the U.S. isn't much better off than Europe or Japan.

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Across the pond, the European Commission now projects that the 17-country euro zone will expand by only 1.1 per cent next year, after predicting a negative number this year. That's only slightly below the previous forecast last spring. But the decline in some of the troubled bigger economies is striking. France, for instance, is now projected to grow by only 0.9 per cent and recession-wracked Spain by a mere 0.5 per cent. Meanwhile, inflation in the region slid last month to 0.7 per cent on an annual basis, putting it below Japan's meagre rate for the first time in 15 years.

China is still growing at a pace most other countries can't even dream of – an IMF-projected 7.6 per cent this year and 7.3 per cent in 2014. But even the most bullish of China watchers must realize by now that their favourite emerging economy is not up to the task of revitalizing flagging global growth. In fact, at current estimates, this amounts to the Chinese version of a slowdown, signalling weaker demand for energy and other resources, as well as the machinery and equipment imports that had helped buoy the German economy for so long. Chinese officials acknowledge that if growth falls below 7.2 per cent, the government won't be able to meet its job creation target. So count on that not happening.

As for the handful of smaller emerging or frontier darlings – the current list includes Chile, Vietnam, parts of sub-Saharan Africa and Qatar and other small Persian Gulf states – their economies are simply too small to lead a global revival. And none of them has anything close to the capacity to absorb a flood of hot foreign money without blowing the place up.

The IMF pegs growth for all emerging markets combined at 5.1 per cent in 2014, up from 4.5 per cent this year. But private analysts are less bullish, because of weaker export markets and softer commodities.

"The emerging markets 'story' has once again been exposed as a pyramid of piffle," Albert Edwards, Société Générale's perma-bearish strategist, said in one of his typically blunt assessments in August.

These are trying times for international investors searching for islands of growth and stability in a roiling sea.

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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