00:00 Speaker A
Even US consumers seem to be losing faith in the United States, both in terms of their investments, fleeing the bond market at a record pace, and then in terms of their concern about inflation expectations. Where should investors be looking if they want to flee the US right now?
00:18 Jeffrey
Yeah, Europe stands out to me. Obviously the risk of recession is rising in the US, but in Europe, it’s much less so. Europe’s economic exposure to US exports is relatively small. EU goods exports to the US account for only about 3.5% of EU GDP, and so the hit from those tariffs, were they reintroduced in 90 days, might shave maybe half a percent or so off of GDP. But look, already you’ve got Germany, which is Europe’s largest economy, approving a big defense spending and public infrastructure package amounting to 2 and a half percent of German GDP. That’s a big offset. And you’ve got further spending, a more of a proposal for EU-wide defense spending, more rate cuts from the European Central Bank, cutting the policy rate below 2%. All that fiscal and monetary stimulus may deliver a sizable boost to growth. Remember, Europe’s coming out of two years of a rolling recession. So, there’s more growth momentum there potentially offsetting any drag from exports, and Europe’s stock market’s reflecting this. It’s outperforming the S&P 500 by 18 percentage points.
02:02 Speaker B
Jeffrey, good to see you here, but isn’t Europe really exposed to what could be a very dramatic slowdown in China?
02:12 Jeffrey
Possibly. China is a bigger end market than the US, but here’s what’s going on in China. China’s got three different budgets, but if you combine all of them, you’re talking about deficit spending this year of 11% of GDP in China. We’ve never seen that before. If they follow through, and China has overpromised and underdelivered before, but if they follow through on that level of support to consumer spending within China, the 40 to 50% of China’s economy tied to consumer spending could boom even if the roughly 3% of GDP of direct exports to the US really slumps dramatically. So, I think China could actually see domestic momentum economically really improve this year. That could be great news for Europe.
03:07 Speaker A
And what does that tell you, Jeffrey, just about the state of play when it comes to all of these global trading partners sort of reallocating who they are allies with? We obviously had the Spanish Prime Minister meeting with Xi Jinping. She is heading to South Africa next week. To what extent do you anticipate a reorder of global trade relationships impacting investment opportunities?
03:34 Jeffrey
That certainly seems to be underway. As a matter of fact, there’s even some talk about reexamining those electric vehicle tariffs on quotas on China as they come into the EU. So, really a lot of realignment taking place perhaps here as the rest of the world sort of shores up their trading partners as they’re worried more about the US. And, you know, that could mean different things. Latin America, for example, much more exposed to China than it is to the US. Brazil is an economy that exports a lot more to China as well. So, we’re seeing maybe a reordering of world trade focusing a bit more on Asia, China in particular.