Analists of HY Markets note:
The U.S economy showed unexpected faster growth at the end of 2011; jobless claims feel to a four-year low, consumer confidence neared four-year highs and average earnings were up. The very fact that 4th quarter growth was recorded at 3%, up from the expectation of 2.8%, could bode well for the US economy in 2012.
As you may expect, the combination of these factors has seen US stock indices rocket back to Q2-2008 levels. On Wednesday the Dow Jones Industrial Average rallied above 13,000 for the first time since Q2-2008, and the S&P 500 followed suit on Thursday when it hit a four-year high of 1,375. Meanwhile the NASDAQ continued its upward trend in Q1-2012 to reach 11 year highs. The S&P 500 in particular was boosted by gains in Europe after Spain and France successfully auctioned 12.5 billion euro’s worth of bond. Goldman Sachs was one of the biggest movers as its share price jumped to $121.13, representing over a 150% increase from 2008 levels.
After last week’s oil surge the IMF was quick to issues warnings over global growth, so despite impressive data the recovery remains delicately poised. Further increases in oil price due to tensions in Iran could damage US consumer confidence as a result of rising household energy costs. Internal issues also threaten to under-pin the US economy, in particular the housing market. The US housing market is a highly leveraged sector given the large quantities of debt involved, any decline in house prices can lead to reduction in household spending. Lower household spending is attributed to negative economic impacts. Europe also remains an area of high concern, although Greece has secured a second bailout the countries fiscal situation, and participation in the Euro, is undetermined.
The less obvious, but very real, threat to the US economy comes from China. China is a huge purchaser of US debt, with around $3.2 trillion in currency reserves. Recent data suggests that China is diversifying its portfolio outside of US securities which could see US borrowing costs rise. In Q1 – 2012 China’s exports also fell which hinted of a slowdown in growth. Similarly underperforming figures in 2012 could lead to stuttering Chinese growth, hindering any global recovery. Concern is also arising that China could be hiding bad debts; approximately 75% of GDP is held within domestic bank accounts, creating a near limitless war-chest to lend to insolvent firms. If the economy of China comes under more strain this ticking time bomb could detonate creating a whole new chapter in global economic crisis.
Signs are promising, but the risks remain global and unclear. The recovery is delicate and risks being crushed by further Eurozone recession, Stagnation in the Chinese economy or by internal economic misdirection. Even worse, it could be a combination of these factors, or something entirely new.
