This Time, It's Global

This morning the World Bank reminded us that the recession is a world-wide affair, and that the U.S. is probably gaining share of the world’s economy despite our economic problems. In other words, while it might be bad here, lots of places have it far worse.

Overall, the world’s economy is expected to contract by 2.9% -- a sharply lower forecast than the 1.7% drop it was looking for in March. The OECD high-income countries are expected to see a 4.2% decline. The primary cause of the world-wide slump is a 9.7% decline in world trade.

For the U.S., the worst of the decline for the year was probably seen in the first quarter, down 5.7%. Assuming a 4.0% decline in the second quarter, a 2.0% drop in the third quarter and a flat 0.0% quarter in the fourth quarter (a somewhat more bearish outlook than the consensus), the U.S. would match the overall drop in the world.

The big rebound in the stock market we have seen since March seems to be looking for a much more robust rebound than that. Indeed, if the 4-week average of initial unemployment claims indicator is accurate this time around, economic growth should actually be turning positive in the third quarter.

If all the developing countries are considered, the World Bank sees them actually growing at 1.2% for the year. However, this is mostly due to relatively strong growth in India and China. Exclude them and the developing countries are expected to see a 1.6% decline. Keep in mind that they tend to have very high population growth rates, and thus their decline in per capital GDP will be much greater.

Positioning your portfolio to have exposure to China and India would make a great deal of sense. ETF’s would be one way of achieving this. However, for those that prefer to use direct ADR’s investments take a look at ICICI Bank (IBN - Analyst Report) and Tata Motors (TTM - Snapshot Report) as ways to play India. For China, a name to consider would be China Mobile Ltd (CHL - Analyst Report).

Another way to play this is U.S. consumer products companies such as Colgate Palmolive (CL - Analyst Report) that have significant operations in both China and India, although there you also get exposure to weaker parts of the world as well.

However, it does not look like either China or India is going to be strong enough to be the locomotive for the world economy. Japan and Europe are clearly not going to drive the choo-choo either.

The U.S. has historically played that role by being the world’s consumer of first and last resort. That is less likely to happen this time around as we try to increase our savings rate in the face of falling incomes and rising unemployment.

The result is that any world recovery in 2010 is likely to be very weak and anemic. It also means that the world financial system will remain fragile, with numerous potential sources for bad loans to develop and cause further difficulties for the international banking system.