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Investing Specialists

When Economies Diverge

Can the U.S. economy keep improving if the rest of the world slows down?

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News from non-U.S. markets this week was anything but pleasant. Late last week and early this week, Spain's bond yields soared yet again on worries about its economy. Then later in the week, data revealed that Eurozone Industrial Production had shrunk a sharp 1.8%, the largest decline since late 2009. The eurozone economy declined by 0.3% in the fourth quarter of 2011 and now appears poised to fall even faster in the first quarter. Inflation in Europe also looked to be on the rise, driven primarily by oil prices. Auto sales for March in Europe also turned in a dismal performance.

On the surface, news out of China was better than Europe's, as China's year-over-year growth rate in the first quarter came in at 8.1%. However, that was down from 8.9% in the fourth quarter, below expectations of 8.3%, and well off a recovery high of close to 12%. A slowdown in Europe, China's largest export partner, and a rapidly slowing housing market mean that dramatic improvement is not immediately in the cards. (I can't help but think the recent political issues in China could distract the government from management of the economy.) A relatively lower Chinese inflation rate (at 3.6% versus 5%-6% a year ago) will give the government a little more flexibility to react to the most recent slowing, if it chooses to, although March's rate of inflation was up from 3.2% the prior month.

Robert Johnson, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.