FYI | Dec 19 2012
– Chinese growth to expand in 2013
– US growth to be modest
– Europe to remain a risk
– Australia to lose its lustre
By Greg Peel
It all hinges on the fiscal cliff. That's the simple reality. On a best case to worst case split, the US economy will either grow by 2% in 2013 or contract by 2%. The latter will affect a damning flow-through impact across the globe. The ball is in Washington's court.
Wall Street has been telling us this week that a cliff resolution is nigh. That's seems to be the likelihood, although it must not be forgotten that the tax hikes and spending cuts required even under the friendliest of bipartisan cliff deals will act as a fiscal drag for the US in 2013 one way or the other. But let us at least assume a resolution is reached at least by early next year. We can thus move on.
The year 2012 was all about central banks and monetary policy, DBS Bank notes. The Fed gave us more QE, the ECB gave us OMT, and Asia provided plenty of rate cuts. None of it has really worked, with the exception of as yet unused OMT, which is working perfectly well so far as a threat rather than a reality. Spanish and Italian bond yields have fallen some 200 basis points over the course of the year.
Yet the threat of OMT has not done anything to solve the underlying problem of imbalances between the haves and have-nots of the eurozone, DBS points out.
DBS expects mild GDP contraction for Europe in 2013. For the US, 2% growth is expected. Asia has now proven it does not need strong growth from the G3 (US, Europe, Japan) to grow strongly itself, but it does need the G3 to not collapse. Assuming a steady G3, China will lead the Asian growth charge. Chinese investment growth was 30% below normal in 2012 and DBS expects that gap to halve in 2013.
Here are some interesting stats from DBS. Chinese investment grew by US$335bn in 2011, which was 30% more than the US and 30% more than all of Asia ex-China. The 30% drop in investment in 2012 knocked 2.5 percentage points off China's GDP. Add back half of the loss and we get a 2013 growth forecast of 9%.
The only problem is, the previous regime left China with a 2013 GDP growth target of 7%. So will it be 7% or 9% in 2013? DBS notes that sequential GDP growth for the September quarter came in at 2.2% seasonally adjusted, which annualises to a rate of 9.1%.
Russell Investments is forecasting 8% growth for China in 2013.
Russell predicts a modestly positive, albeit volatile investment environment in 2013. The US and China will drive continuing modest growth, but the European recession and lingering insolvency fears will ensure volatility remains elevated. Russell sees the “reluctant yet measurably positive recovery path” the world has taken on a net basis since 2009 to continue through 2013. What will be interesting from an investment perspective is what the analysts call the “squeeze play”.
The economic recovery may be set to follow a less than inspiring path for the “risk on” investor, but the reality is that investors still demand real returns on their assets, and real interest rates are in negative territory, Russell notes. Peter Gunning, Russell's global chief investment officer:
“Since only positive returns build wealth, investors are forced to confront the question of what is to be done in a yield-starved world. This 'squeeze play' impulses people into riskier assets; we continue to advise clients to proceed purposefully and with strategic discipline.”
In short, Russell advocates portfolio diversification, both regionally, and with an eye to alternative assets. Volatility will provide risk, but it will also provide opportunity for “multi-asset, adaptively managed” portfolios.
The ANZ Bank economists also see China and the US as critical to global fortunes in 2013. Both should build economic momentum next year, but whether they can do this, and thus drag Europe and Japan along in their wake, will likely come down to political leadership, ANZ suggests.
In the US, the housing recovery is firmly on track but this now needs to be backed up by a loosening of GFC lending standards, ANZ suggests. Business investment must improve, which can hopefully be the case after a cliff resolution but is still uncertain in the face of concerns over growth in Europe, and over China. ANZ forecasts 2.5% growth for the US in 2013.
For China, ANZ is forecasting 8.1% growth. After dropping to three-year low growth in the September quarter, China's momentum appears now to be on the turn to the positive, if the data is any guide. It is significant, the economists suggest, that the incoming premier has affirmed that urbanisation will be a major driver of growth next year. Inflation is nevertheless the risk. If inflation starts to run again China may be forced to tighten policy once more, and cause GDP growth to reverse once more.
ANZ expects Europe to slowly emerge from recession in 2013 as external demand from the US and China increases, but only to a growth level that is sluggish at best. Under Japan's new government, ANZ can see 1% growth next year.
But what of Australia?
Unfortunately the outlook is not so inspiring downunder. Russell Investments sees several headwinds for Australian GDP growth in 2013 and few tailwinds. The “two-speed” economy so dominant up to this point will merge back into one in 2013 as the once booming mining sector falls back to the pack, and overall growth becomes mediocre. Russell is predicting below-trend GDP growth of 2.0-2.5%.
The analysts note that the Australian government is attempting to push ahead with the greatest fiscal tightening plan since 1970. They nevertheless do not expect a return to surplus to be achieved.
ANZ can see Australia's GDP growth slipping to “well below trend” if the non-mining sectors of the economy cannot gain enough momentum to offset the weakness ahead for mining. Indeed, the economists do not believe they can. After an impressive run on the global stage post-GFC, Australia will likely see slow growth in 2013, and rising unemployment. There should thus be no threat of inflation however, and the Aussie will likely remain high. This gives the RBA scope to cut rates, ANZ notes.
The good news – perhaps – is that Russell Investment's believes the Australian stock market is 7% undervalued at present. While the analysts don't see that gap closing much in 2013, they do believe the market will be strongly supported by dividends, offering better yields than those on offer from term deposits.
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