Global Themes For 2013
In many ways, 2012 was a year of transition, in which the global economy could easily have sunk into recession, but the worst was narrowly avoided . We expected big answers to big questions, such as whether the eurozone would hold together, and whether China ' s economy would go into meltdown -- but we merely got hints, with the potential for resolution in 2013. Elsewhere on our online service, we have provided region-by-region previews of the year to come. Here, we outline some our views on how the major unfinished business in the global economy may be resolved in 2013.
A Better Year For Growth
Our relative optimism for economic activity is captured somewhat by our 2.9% global real GDP growth forecast for 2013, a rise from 2.5% in 2012. We are also forecasting higher growth in 2013 in each emerging market region compared with 2011. With so much monetary stimulus around the world, and so much potential output still untapped, we believe that the risks are to the upside in most corners of the globe. While fiscal tightening and ongoing deleveraging will continue to weigh on US growth, for example, we see very strong upside risks in the lat ter three quarters of the year as residential construction and business investment improve . Chinese growth is strengthening, at least temporarily, and even the eurozone was beginning to surprise to the upside as of late 2012. Real GDP growth below 3.0% can hardly be considered strong, but it may well come as a relief following a year of tremendous economic uncertainty.
|A Better Year Ahead|
|Real GDP Growth (%)|
It is impossible for every country to weaken their currency simultaneously, but that is essentially where we could be headed in 2013. Fed-induced weakness in the dollar will help the US rebalance its external sector away from imports, but it will put pressure on other countries that have maintained competitive currencies via intervention. In Europe, for example, a weaker currency is warranted by current economic conditions, but Fed policy has pushed the euro to multi-month highs. Combined with rising commodities prices, policymakers outside the US, particularly those in emerging markets, are facing a tough set of choices. Either they allow their currencies to appreciate, or they experience domestic inflation (and thus real appreciation). Some countries - Turkey and Brazil, for example -- have staunched the tide temporarily via unorthodox measures, but those have their macroeconomic cost too. With developed world central banks continuing to expand monetary policy, with no end in sight, EM policymakers will have a serious headache. We are even considering the possibility of an EM FX 'bubble' forming over the next year or so, as foreign inflows go beyond the saturation point in some local markets. In this environment of attempted universal currency debasement, we believe that gold prices will increase.
Eurozone Keeps It Together...Just
Last year we expected a 'solution' to the eurozone crisis. It came, part-way, in the form of European Central Bank initiatives to conditionally purchase peripheral eurozone debt, which changed the game at least temporarily for sovereign debt markets, and potentially put the ECB on a path of no return. Although there has been no resolution yet, and it looks as though the to-and-fro will continue for years to come, we hold to our core view that the eurozone will ultimately hold together. We have several expectations for 2013. Two major elections - in Italy and in Germany - could shape the face of the global economy, though we are relatively sanguine over the results (both should affirm the prospects for further eurozone integration). Meanwhile, the ECB will ease policy further and will experiment with more unorthodox policies such as negative deposit rates. The most important development will be the implementation of the Outright Monetary Transactions (OMTs), which will have a significant bearing on the course of future state bailouts. Spain will receive a bailout (with conditions, of course), while there will be more progress on debt forgiveness for Greece. France will increasingly come into focus in 2013 as concerns over growth and competitiveness come to the fore. And the UK could be dragged into the fray, with the country's very membership of the EU at stake.
Global Trade Recovers, But Not All The Way
One of the most worrying developments in the global economy in 2012 was the deterioration in global trade, as demarcated by the year-on-year contraction in global exports by the second half of the year. We estimate US dollar export growth of just 0.8% in 2012, which is a shocking reversal from an average of 17.5% in 2010-11, and the worst for a non-recession year in this century. This deterioration was symptomatic of a global recession, but we believe that with demand picking up in 2013, exports should enjoy a modest recovery (with 5.9% growth). For several emerging countries (Asian exporters), as well as more developed open economies (such as Sweden), the revival of export markets will be most welcome.
|Global Trade Should Rebound|
|World Exports, % Chg y-o-y|
The US Finally Turns The Corner
There are signs that, more than four years since the Lehman crisis, the US economy is finding its feet again. Our 2.1% real GDP growth forecast for 2013 is more or less in line with the slow and erratic growth that has characterised the US economy since the recovery began in 2009, but we are increasingly seeing upside risks to the growth trajectory in the second half of the year. Much of the uncertainty surrounding the economic outlook is coming to an end, with the 2012 elections returning the status quo situation in Washington, and a fiscal cliff agreement likely to be reached before too long. Residential investment will continue to be an economic bright spot, and we believe that once the fiscal cliff issues have been resolved, strong corporate balance sheets will provide a platform for capital expenditures in the latter three quarters of 2013. Though the deleveraging process continues, credit growth is showing signs of life, and the financial sector is healing.
|Normal Service Resumes?|
|US - Implicit GDP Deflator (% chg q-o-q ann.)|
Stronger nominal GDP growth and low interest rates (thanks to the Fed) have helped keep household debt as a percentage of GDP declining as well, which has meant a more orderly deleveraging process than seen elsewhere. For years we have believed that the deleveraging process would not be concluded until 2014-2015, and we remain of that view, but our bias is increasingly for normal leveraging to return sooner rather than later. There are even the known unknowns that could put the US in a very strong position for years to come, from the 'on-shoring' of manufacturing production, to the shale gas revolution.
China Rebalancing...But It Won't Be Easy
China's economy was weaker than most expected in 2012, but we had long thought that a slowdown, if not a meltdown, was due. At this stage, China's leading indicator indices are pointing to further expansion, and the strong bounce in coal and iron ore prices is a signal that that recent bounce seen in China's steel industry and infrastructure investment is set to continue. However, we believe that the recent bounce in economic activity should be considered within the context of a broader hard landing in which growth will seriously underperform consensus expectations over the coming years. China's economy still remains reliant on investment and exports, and neither are going to be as strong as in years past.
|Moment Of Truth|
|China - Real Consumption And Investment Growth (%)|
It may come down to policymakers' resolve to rebalance the economy toward consumption, and 2013 will be crucial. The final stage of the Chinese government leadership transition will take place in March 2013, when the National People's Congress meets. Over the medium to long term, the incoming leadership will also need to implement reforms to rebalance China's economic growth model away from fixed-asset investment and exports and towards one driven more by private consumption (which is currently less than 40% of GDP and has been shrinking proportionally for many years). The process will also involve reducing state involvement in the economy, which has actually increased in recent years. However, given that the new Politburo Standing Committee members seem to have a cautious to conservative bias in their approach, we do not expect them to undertake radical reforms. Rather, we expect gradualism to prevail, especially so that the balance of power between reformers and conservatives in the CPC can be maintained. The question is whether their hand will be forced by economic reality, from over-investment in unprofitable assets, to massive amounts of bad bank loans. We take some encouragement that, by our estimates, Chinese consumption growth outpaced investment growth in 2012 for the first time since 1997 -- when, not coincidentally, the major imbalances in the global economy began. Still, slower overall GDP growth in the coming years seems assured.
Demographic Time Bomb Going Off
One of the big themes in the next year or two will be how governments finally take action about the fast-mounting obligations for the older population. If there was any aspect of the ongoing crisis that was predictable, it was the fact that it came at a demographic inflection point, as the aging baby boomer generation began to hit retirement age. This is primarily a problem in developed states, where there are entrenched and increasingl y expensive social safety nets. Nowhere is this more true than Japan, where a rapidly aging population has forced serious questions about the country ' s growth trajectory and debt sustainability. After years of mounting pressure, the newly-elected LDP government appears to be attempting to take the inflationary route out starting in 2013 , but this would have very negative consequences for pensioners on fixed incomes . The eurozone is at the centre of the mess, with governments throughout the bloc reassessing the sustainability of their welfare states in the context of mounting fiscal pressures. Greece has tentatively agreed to cut payouts to pensioners by 10%, the most draconian cuts anywhere in the developed world. Elsewhere in the eurozone, governments will have to up the ante , despite the likelihood of massive opposition: pension expenditures as a percentage of GDP are 15% in France, 13% in Italy, and 9% in Spain, and mounting fast . Even in the US, where the demographic outlook is relatively favourable, the estimated unfunded liability for Medicare and Social Security amounts to US$ 100 trn, forming a central debate in fiscal negotiations. Retirement ages are being raised almost across the board. These issues have been discussed for decades, but the bill is starting to come due. The response, by both governments and the electorate, will be pivotal in determining the long-term fiscal health of the developed world.
|Old-Age Dependency Ratio (Those Aged 65+ to those aged 15-64)|
Big Geopolitical Risks
2012 was, as we said in our annual preview, likely to be the 'year of political risk', with so many key elections and high-profile policymaking decisions to be made. Perhaps the biggest single political risk with major international implications in 2013 is the growing possibility that Israel will launch airstrikes against Iran's nuclear programme. Israeli Prime Minister Benjamin Netanyahu is likely to be re-elected in January 2013, and could interpret his victory as a 'mandate for war'. Although Israel may hold off under US pressure, it may lose patience completely if Iran elects another hardliner as president in June. Israel could conclude that Tehran will not compromise over its atomic programme and that it faces a 'now or never' moment to neutralise this perceived threat. Yet, the consequences of action would be substantial, triggering a war in the Persian Gulf. Elsewhere in the Middle East, we remain vigilant towards Egypt, amid a highly volatile political environment, and we expect the Assad regime in Syria to collapse in 2013 - although in our view, the civil war will continue. Furthermore, Jordan is seeing greater signs of unrest. Other major risks include the eurozone crisis, discussed elsewhere in GMM, with the big events to watch being the Italian general election in the spring of 2013, and the German election in the autumn. However, in both cases, we do not expect a major departure from the status quo. In East Asia, we see scope for further tensions between China and Japan over their maritime dispute, especially with new leaders taking office in both countries. Japan, in particular, under new premier Shinzo Abe is likely to adopt a more robust defence policy, and his brand of overt nationalism could further antagonise China and South Korea. As for Korea itself, the outlook is mixed. The incoming Southern president is expected to pursue friendlier relations with the North, but it is far from clear if Pyongyang will reciprocate. Indeed, the North's Kim Jong Un could test his new Southern counterpart with more provocations.
Turning to Latin America, we see a growing risk of a change of president in Venezuela, due to Hugo Chavez's illness. His death or resignation would necessitate a new presidential election, which would pit Chavez's designated successor, Nicolas Maduro, against Henrique Capriles, whom Chavez defeated in October 2012. Regardless of whether Capriles wins, we believe that it would take many years to put Venezuela back on the path of economic orthodoxy after more than a decade of state interventionism. Further south, we believe that Argentina could experience a fresh economic and political crisis, as the authorities may be forced to devalue the peso and come under growing pressure to pay 'holdout' bondholders from the 2001 default.