USA, the world's largest economy, growth scenario continues to crack.

Chart of the week

The chart shows the share of the respective country/region as a proportion of global gross domestic product (GDP). The USA (black line) has been the largest economy for 10 years and is continuing to extend its lead. All the major new products and services that have changed our lives come from the USA (Apple, Amazon, Google, Facebook, Tesla, NVIDIA, etc.). Europe remains stable in second place (blue line). China (red line) was in the fast lane and many predicted that it would overtake the US as the world's largest economy. But the Covid crisis and the subsequent real estate crisis slowed China down. Deglobalization, also known as onshoring, is currently taking place. This is to reduce political dependencies. Foreigners are now only occasionally building new factories in China, but instead in Eastern Europe, the USA or Mexico.

Japan has been on the decline for almost 20 years (brown line). Japan's share of global GDP is falling steadily. One country that is steadily increasing its share, however, is India (green line).
Why this is important

These global developments are important for correctly weighting the countries and regions in the investment portfolio. But the picture above looks to the past. How will the picture develop in the future?

A good indicator is to look at which countries or regions are registering the most patents. After all, patents are the products of the future.

The USA is clearly the leading country in terms of new patents. The figures are from 2022. China is likely to have caught up somewhat by 2023 due to new patents in the artificial intelligence sector. As there are fewer data protection regulations in China, much more is possible there than in the USA or Europe.

What is somewhat lost in the statistics is that Europe as a whole is still ahead of the USA.
The conclusion for the development of the share of global GDP: The USA should remain stable at the top. Europe and Germany in particular should not be written off. China's share should also remain in the top ranks, but it is unlikely to overtake the USA and Europe any time soon.

The USA has a weighting of over 60% in the global equity benchmarks. It is advisable to maintain this weighting in the portfolio.

Further cracks appear in the growth scenario.
Various economic figures were published in the USA last week. In summary, growth was lower than expected (1.6%) and inflation higher than expected (3.6%).

The chart shows the growth of the US economy in recent quarters. Growth of over 2% was originally expected for the first quarter of 2024. Growth of 1.6% has now been published.

Growth is still positive and there are no signs of a recession. But it is lower than expected. But low growth and stubbornly high inflation is not a very positive scenario. Such a situation is called stagflation, a word combination of stagnation and inflation.

The chart shows the development of inflation (blue line) and headline inflation (red line, inflation excluding volatile energy and food prices) from 2019 to date. To the right of the vertical line is the forecast by investment bank Goldman Sachs. This is pretty much in line with current market opinion.

The chart shows the development of the US purchasing managers' index (ISM) and inflation (CPI). It has been shown in the past that the index of purchasing managers of large companies has a 10-month lead time to the development of inflation. This is logical, as it takes a few months before companies can pass on higher costs to customers. This correlation suggests a trend towards higher inflation in the coming months.

This is now a contradiction to the Goldman Sachs estimate. We are convinced that inflation will not fall constantly, as previously expected. This is likely to have a negative impact on share prices in the coming weeks. The probability of interest rate cuts will continue to fall.
What fits in with the rather negative picture is the view of small companies in the USA. Around 60% of all jobs in the US are created by small companies and not by the big ones like Apple or Tesla.

The chart shows the development of the Small Business Confidence Index in the USA. The confidence of CEOs of small companies with regard to future economic development is very low. It was only lower in 1978 and during the 2007-2009 financial crisis. If some of the big companies now trade up and start laying people off, the rest of the US will not be able to absorb this and the spiral will continue downwards.
In the meantime, interest rates remain high. On May 1, the US Federal Reserve left interest rates stable.

The chart shows the development of interest rates for 30-year mortgages in the USA. In 2021, they were still at 2.6%, now they are over 7%. Homeowners who need to refinance their loans are having to dig deeper and deeper into their pockets.

The graph shows how the costs for mortgage holders change when they take out a new mortgage. The amount has multiplied since 2021 (black line) compared to today (light blue line).

The longer interest rates remain high, the more painful it becomes, as more and more borrowers are affected.

The chart shows the number of mortgages that expire and need to be refinanced. In 2024, the number is much higher than in 2023. The difference between the orange and blue bars also suggests that many people only took out short-term loans in 2022 and 2023 in the hope that interest rates would soon fall. They will now be hit even harder in 2024, as interest rates have risen further.

Rising mortgage costs will primarily affect middle-class consumption. This is likely to fall rather than increase in the coming months.
The overall picture of the data suggests that the markets will remain volatile. We are sticking to our cautious strategy with a focus on value stocks and maintaining a high cash ratio.