Recent economic data has proven highly variable with signs of an upcoming rebound in industrial production mixed with conflicting signals from official and survey data. In aggregate, global growth in Q4 appears likely to ease from even the prior quarter’s sub-par pace, led by a slowdown in the US and a steeper contraction in the euro area. Hopes are squarely pinned on China and the rest of Asia, excluding Japan, recovering from earlier weakness.
Hopes are squarely pinned on China and the rest of Asia
For this year as a whole, the global economy is likely to report only 3.0% growth compared to 3.8% in 2011. The slowdown in Chinese activity to 7.5% from 9.3% last year (but with a “hard landing” avoided) combined with the euro area sliding into recession (-0.5% after 1.5% last year) were the key contributing factors.
Economic Forecasts for 2013
Looking forward into 2013, most commentators expect global activity to gather momentum as the year progresses, although this is tempered by concerns over the US “fiscal cliff” and the ongoing economic malaise and political disarray in Europe. Should reason and political good sense prevail in US fiscal negotiations, many commentators expect US growth to be in a 2.5% to 3.0% range by year-end compared to the near 1.5% rate generally predicted for this quarter and next. Easier financial conditions should gradually feed through and improve the outlook for Europe but, more importantly, there are clear signs that Chinese growth is beginning to reaccelerate and overall, emerging economies will account for the vast bulk of the expected advance in 2013 GDP growth to around 3.3%.
The table below shows estimates for the main economies from the leading investment houses, including forecasts for 2014:
Expectations for the US Economy in 2013
The US is currently producing mixed signals with the near-term outlook clouded by the impact of Hurricane Sandy and differing domestic reactions to fiscal cliff fears. Corporates appear to have reined in spending far more aggressively than consumers, for example, while even manufacturing PMI surveys (by the ISM and Markit) are significantly at odds with each other. Even with a “successful” resolution to the debt negotiations, fiscal policy must tighten and growth over the next quarter or two is set to remain lacklustre. The key is to monitor US auto sales and housing data and if, as seems probable, consumer confidence is sufficient to generate continuing strength in these areas, GDP should eventually follow.
Emerging Economies Remain Central to Future Global Growth
As noted earlier, the emerging economies, especially China, remain central to the 2013 global growth forecast being achieved with China’s new leaders expected to continue the existing accommodative regime. Elsewhere, Japan should rebound from its latest fall into recession with the prospective new leader, Shinzo Abe, calling for a sizeable expansion of stimulatory policies. A gradual recovery is also forecast for the UK and euro area but ongoing fiscal retrenchment, deleveraging and credit constraints are strong headwinds to overcome ensuring weak growth at best; further QE may well be required in the UK next year. While the US fiscal cliff has recently overshadowed concerns in the euro area, growth remains very weak and ongoing economic and, increasingly, political developments will generate further friction and instability.
Overall, the consensus expects some improvement on 2012’s weak outturn with risks concentrated earlier in the year. Hopes are rising that a self-sustaining US expansion could be in place by next year-end in tandem with growth, albeit very modest, in Europe and Japan.
Actions at Central Banks
The major central banks left policy virtually unchanged but, while the UK’s MPC indicated a near term halt to QE purchases, very poor data in Japan and comments from the prospective prime minister suggest substantial further monetary easing to come. This ensured another bout of yen weakness which, on a trade weighted basis, depreciated by 3%. Elsewhere, the main crosses all traded within recent narrow bands.
Stock & Bond Market Movements
Riskier assets continued to outperform with peripheral bond markets, emerging market debt and high yield all producing another month of strong gains. Corporate investment grade returns were mixed, however, with the UK once again recording returns in excess of 1% while profit taking generated very modest losses in the US. Main government bond markets also produced positive returns as weaker economic data and ongoing QE supported prices.
Stock markets were generally stronger but with the main global index, the MSCI World Equity Index, restrained by another month of US underperformance. The Japanese TOPIX benchmark was the standout performer rising over 5% as previously weak exporters soared, while interest in European and Asian equities continued to build. The dichotomy in Chinese market performance became increasingly stark with foreign investors still buying ‘H’ shares (+2%) and locals continuing to unload ‘A’ shares (-4%), causing the Shanghai Composite index to reach a four-year low at month end.
Sector performance tables were led by more cyclical areas, with the consumer discretionary sector in favour while, in terms of market capitalisation size, there was no real change in trend, although large-caps modestly outperformed everywhere except in the US.
