Australia | Dec 07 2012
By Andrew Nelson
2012 was a difficult year for the global economy and in the short-term, conditions are likely to remain sluggish as the US continues to come to grip with its fiscal cliff. A bit of fiscal contraction in Q1 is also likely, with GDP data suggesting a build-up of inventories in Q3 that will have to be cleared out over the current Q4 as well.
It’s the same near-term story in the euro area, with GDP also looking like it will soften in Q4 on weak order levels and the likelihood that some companies will move to reduce production in December as employees head off for an early Christmas holiday to clear inventories.
Yet at the same time, economists from Danske Bank note many of the headwinds present in 2012 are easing and policy stimulus remains in full force. As such, the Danish bank expects to see improvements across almost all economies, which it believes will build up to being the first synchronous recovery in the world since 2009, with emerging markets likely to be a driving force in the turnaround.
Let’s take a look at those headwinds that Danske is sure will ease in the coming months. The bank has outlined three major uncertainties that have kept a lid global growth in 2012 that should either abate or disappear in 2013.
The first big issue is, of course, the ongoing euro crisis. However, with the ECB now having announced the Outright Monetary Transactions (OMT) programme and given the decided improvement in the Greek situation, fears about Europe, while certainly not gone, have at least come down to more comfortable levels. We all know there’s more stress to come from the Old Countries, but Danske believes the OMT programme will at least make it easier to fight off the levels of uncertainty that we saw in 2012.
Just so we’re all on the same page, the OMT programme is where the European Central Bank makes purchases of bonds issued by Eurozone member-states in the secondary, sovereign bond market. The purpose is to bring down bond yields to levels that effectively lower borrowing costs for countries that face problems selling debt. Thus, investors become more confident and will hopefully buy up bonds in the normal market.
The next issue that has haunted 2012 is one of a Chinese hard landing, with most everyone initially surprised by the extended slowdown in Chinese activity and further concerned by talk of a housing collapse in China. However, Danske notes there have been some cautious signs of recovery in China, with further improvement now expected over coming quarters. This should go a long way towards quelling fears of a long recession in China and thus help to improve sentiment in countries with high exposure to China. Hello Australia.
The third issue, I’m sure you’ve all guessed by now, is the US and its fiscal cliff. Once again, Danske only expects this issue to remain an issue for a few more months then hopefully a solution is found that will avoid the worse-case scenario of a directionless US economy. A timely resolution will see confidence creep back into US companies and investment dollars that have long been held back should start streaming back on to the field from the sidelines.
The bank seems fairly confident on this point, noting earnings have been stable or pushing higher, which has left American companies with decent cash buffers. Companies are also running lean and mean after the past few years of hardship, with cost cutting one of the main tools employed to preserve earnings.
This all leads Danske to forecast global GDP to rise 3.8% in 2013 on the back of what was will likely be 3.3% in 2012. The bank’s forecasts for 2014 are set even higher, predicting global economic growth will rise a further to 4.0%.
Extra help will be offered by a recovery in emerging markets, which have spent the past two two-years in a slump. A heating up in EMs will thus provide an important push for global demand. China is the key to the bank's EM expectations, noting stronger activity here will be crucial for the global economy, as it drives around 75% of global growth.
Yet even though Danske clearly expects a global economic recovery to take hold in 2013, the bank warns caution, predicting the improvements in the year ahead will only be moderate to start with. Fiscal policy, which up until now has been the developed world’s saving grace, will limit upside as handily as it limited downside. Thus, currently low rates are quickly becoming a drag on growth.
Lastly, something will need to be done about the high levels of unemployment in Europe and the US. High unemployment means low wage growth and low wage growth limits consumer spending. While low wages do improve competitiveness relative to emerging markets, this positive effect will come nowhere near to compensating for the loss of consumption, at least in the short term.
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