Tuesday, 8 January 2013

Macro Economic Trends – Global Outlook – 2013

Previous analysis by the talking heads of Wall Street and the City expected that, even under the ‘new norm’ conditions, that 2012 would contain the strong ‘foot-hill’ fundamentals of a healthier economic era.

Previous Stalled Expectations -

Compelling negative incidents of the intervening four years have disproved such simplistic expectation, geo-financial after-shocks including an unseen level of American balance sheet indebtedness as a result of massive QE, the European sovereign debt crisis and its affect upon EU relations, an apparent illiquidity induced ‘zombification’ of the western banking sector and its financial pipeline to SME clients, and most recently the emergence and partial satiation of the US “Fiscal Cliff”. And beyond the man-made, economic turmoil has been induced by natural disasters such as the Tohoku Tsunami and Fukushima Disaster in Japan and Hurricane Sandy in the USA.

US Economic Damage Limitation -

The seemingly all-consuming concern of the US “Fiscal Cliff” has thankfully waned; for now, “a can kicked down the road” to yet again re-iterate the most over-used phrase of 2012. John Authers at the FT highlights the fact that the issue was hardly cliff-like in nature when properly viewed. So doomsday perceptions over-egged by the excitable ‘hyper-venting’ of American TV financial commentators reflecting an ever more docu-drama popular news mentality.

Easing Capital Buffers -

And now the ‘Basel regulators’ believe that banking capital tier-1 ratios may be lowered or at least deferred, having seen improved investor sentiment toward the banking sector and seemingly convinced of present blocked financial intermediation throughout the EU economy.

Thus, presently, here at the beginning of 2013, all appears well, that crucial interplay of Capitol Hill and Brussels easing global market worries and placing a new footing under the jitters that promised to stall the re-born confidence of the last 9 months in western equity markets.

2013 General Commentary –

The following captures the mood of both the economists’ sphere and that of the investment banking world; with an amalgamated outlook drawn from data sets, observations and commentary by the likes of the OECD, The IMF and various un-named investment banks own forecasts.

Additional comment from investment-auto-motives follows the given facts and statements.

[NB bank sources, taken from the public domain, are not named to avoid bias or unintended influence].


The following is a condensed version of the organisation’s own text, dated late November 2012.

- Hesitant, uneven global recovery over next 2 years.

- Labour markets weak, approx 50m unemployed in OECD area

- This set to remain high as structural adjustments are enacted

- Decisive policy action needed, led by US & EU.

- EU remains serious threat to global economy

- More to be done to tackle negative links across public finance, banking solvency and EU exit.

- EU Banking Union with 'backstops' and re-capitalisation seen as crucial

- EM regions to get further fiscal and monetary poliies to off-set weakened exports

GDP Growth Rates :

OECD: 2013 at 1.4%, 2014 at 2.3%

US: 2013 at 2%, 2014 at 2.8%

Japan: 2013 at 0.7%, 2014 at 0.8%

EU: 2013 at -0.1%, 2014 at 1.3%

China: 2013 at 8.5%, 2014 at 8.9%

BRI(C), Indonesia and S.AfricaGDP expected to see GDP “gather steam”

General Outlook suggests a possible positive scenario could arise if decisive policy actions are taken to improve business and consumer confidence, and to boost growth and jobs worldwide. The rapid and broad implementation of structural reforms, not least in labour and product markets, is key to this scenario”.

As has been the historical case, whilst the full OECD Outlook document is information heavy on a country by country basis, the summary itself tends to offer little by way of acute guidence, its role to set expectation, and indeed to possibly during this dour period, to create an aura of self-fulfilling economic confidence.

International Monetary Fund –

FT Video recently displayed the IMF outlook for advanced economies:

Eurozone: 2012 at -0.5%, 2013 at 0%, 2014 at 1%
Germany: 2012 at 1.25%, 2013 at 1%, 2014 at 1.5%
France: 2012 at 0%, 2013 at 0.25%, 2014 at 1%
Spain: 2012 at -1.75%, 2013 at -1.5%, 2014 at 1%
UK: 2012 at -0.25%, 2013 at 1%, 2014 at 2.2%
US: 2012 at 2%, 2013 at 2%, 2014 at 3%

At first glance investment-auto-motives suggests that the IMF could be latterly seen to be perhaps somewhat under and over optimistic regards specific EU and EM countries. Germany’s ongoing strong rebound should be supported by US and indeed reborn European demand, especially so within Germany, so evening-out its almost total reliance on emerging countries for its high-value industrial and consumer exports since 2008.

France looks unlikely to rebound so quickly to 1% by 2014, it perhaps hit hardest by EU restructuring, caught directly within a distinct ‘value-chasm’ between an expectation of maintaining northern European wage levels whilst combating new strides in southern European competitiveness and productivity; thus having to direct a medium route that could effectively see ongoing low level growth rates below 1% for some years.

Spain’s figures appear overtly optimistic, gaining from -1.75% to +1% in a two year timeframe, a better approximation being at best a reaching of 0% and so alleviation from painful economic contraction.

The UK seems somewhat over-egged as well, with an expectation that at best 1.75% (not 2.2%) will be reached in a steady manner, a better long-term outcome than mid-term over expectation and failed delivery so disturbing the City.

But of vital importance is the view that the US data appears to reflect a realistic outcome given the new era optimism seen both on Wall Street and on Main Street.

Brazil: 2012 at 1.75%, 2013 at 3.75%, 2014 at 4.25%
China: 2012 at 7.75%, 2013 at 8%, 2014 at 8.25%
India: 2012 at 5%, 2013 at 6%, 2014 at 6.25%
Russia: 2012 at 4%, 2013 at 4%, 2014 at 4%

It is believed by investment-auto-motives that the Brazilian data seems very optimistic given its now heavy reliance upon infrastructure spending up to the 2016 Olympics and what appears a retrenchment in consumer spending confidence, an important part of the previous growth story. 2.5% in 2013 and 3.0 in 2014 believed a more realistic outcome.

China on first view looks right given its need for economic stabalisation and a deflationary stance, but investment-auto-motives suspects that the new incoming Party leader and Polit Bureau cabinet may seek an even greater deflationary measured so as to slow internal rates of wage increase, retail pricing and critically housing prices, for the general betterment of the masses. This then equates to the slower growth views of one well respected economist, possibly even toward a ‘lowly’5% growth rate, which then harmonises with global conditions in the long run.

India’s figures appear realistic given the need to re-charge the economy after its painful slowdown from 8-9% over preceding years, having seen partial re-configuration of industry and the general economy toward a more globalised India in recent years

Russia’s flat-line figures however appear harsh given the promise of a new oil, gas and general commodities cycle directed toward the West as part of its rebound. Whilst new coal, shale and gas extraction have been headlines of late, the fact is that the immensity of Russian export volumes and a probable reduction of Eastward consumption and supply indicates a reduction in energy costs – seen in Oil Futures – so assisting the EU recovery and perhaps a 5% Russian growth rate by 2014].

The Investment Banking Arena -

The following provides a snapshot of the general mood.

Concerns -

EU contagion risk into global economy looks far reduced, ECB safety net, OMT etc, improving realisation that economic fundamentals must be re-arranged ”

Europe, public fiscal consolidation and private sector deleverage creates a deteriorated downward revision, OMT simply relieving immediate pressure, continuing into 2013 and beyond requiring major structural change within the EU economy.

US income growth slowed, savings levels dropped from 5.5% to 3.4%, with some retail consumption estimates seen as overtly high; consumers with little additional disposable income to increase sales.

Cautious Optimism -

Base case is that 2013 is better, deleveraged, banking sector aids stronger macro-fundamentals”.

Time profile of growth looks different, weak early on in year relative to US fiscal cliff, acceleration later as degree of fiscla drag diminishes and healing of private sector comes into effect”.

Oil constraint on global growth has grown less tight, capacity growth previous slow because of GDP demand growth, so easing of supply costs of conventional and shale extraction bodes well

We do expect another relatively weak year for growth in the global economy… (But) I think there are, underneath the surface, some important reasons why 2013 might feel a little friendlier than 2012.”

In our view, the key challenge facing the Euro Area authorities is to exploit the collective strength of the countries, in order to overcome the weaknesses of some parts of the Euro Area.”

The 2008 crisis demonstrated that flows were going through ‘financial pipes’ that were not harmonised, so creating a rapid repatriation of money to the north. Public sector funds now replacing previous private finance, via a central bank ‘hub and spoke’. However, though risks to a structural Euro collapse have increased (if one spoke breaks) expected that normalisation will resume as banking sector is slowly re-strengthened and made healthy”.

Expectation -

Weak year, just above 3% globally, potential rate is 4-4.5%, 2% in USA, contraction in EU, 8% in China just like 2012”

- Big picture risks reduced.

Triad Economies -

- US loose monetery policy though much abated still continues, assisting all.
- UK leads Eurozone return to health, green shoots in banking sector
- Confidence in equity markets as growth recovery solidfies.
- Bond markets stay in lowish levels but drift higher.
- Interest rates expected to slowly rise, per US housing recovery.
- But benign inflation expectations given spare industrial and labour capacity
- Oil at high levels but any further upward pricing contained.
- Dollar to weaken assisted by Fed.
- This off-set by ASEAN and EM currency strengthening.
- Equities valuations stable, “still priced for reasonable growth income”
- “Friendly asset market picture.”
- “See a 10% return in US equities for 2013”

EM Economies -

Emerging markets have a different picture, less spare capacity, pick up in growth creates inflationary pressures and so rise interest rates expected”.

Focus on China:

- Chinese growth at 8% / soft landing scenario. no major shocks expected,
- Cyclical issues muted by government action: $4trillion liquidity injection vs fiscal tightening
- But structural issues still remain: house price over-inflation, over-investment in supply-side, both requiring major adjustment.
- Medium term challenges: to rebalance growth from investment and exports toward internal consumption. Also to phase out government pricing structures on energy, to diminish the still powerful role of state owned enterprises so as to induce privatisation-led innovation and competition.
- Mass market Chinese consumers seen to be key to country’s healthy future, so creating an expanded internal demand, thus switched away from the core middle-class and high net worth aspirationals
- But lack of social “safety-nets”, the realistic attitudes towards healthcare costs and education costs, undermine a maximisation of mass-market consumer spending.

Pro-Western Investment Attitude -

The following provides the publicised investment perspective of one major investment bank; this is provided by investment-auto-motives not as recommendation (esp given its autos focus) but simply to provide one 'attitudinal overlay' born from the previous intelligence.

- Overweight on : utilities, healthcare, technology : equities developed markets (US, EU, Japan)
- Marketweight on: energy, industrials, telecoms, staples :
- Underweight on: decretionary, financials, materials : fixed income developed markets

Improvement in N. American manufacturing competitiveness, with significant productivity gains seen in recent years relating to middle-value goods, (ie without high labour content). Furthermore, the expected reduced taxation benefits [accruing from a fiscal cliff deal] would assist manufacturing sectors.

Aggressive monetary policy measures are reducing the systemic risks and ensuing swings in investor positioning that have dominated markets since the start of the great recession. So moving away from risk on/risk off. However, significant fiscal tightening and associated business uncertainty across the major developed economies, as well as structural changes in Europe, will continue to hold back growth in early 2013”.

General Attitude -

During the past year, investor concern about systemic risks - from euro area dissolution, to China's hard landing and a financial system collapse - has faded considerably. This is leading asset prices to be driven less by macro developments and more by asset-idiosyncratic considerations as well as return-seeking flows into the next not-too-risky asset class”.

However “an inability to fully dispose of 'fiscal cliff' issues, will not produce a comprehensive deficit reduction plan that would put the US on a fiscally sustainable path and be constructive for markets and growth”

For the first time since the crisis began, European policymakers have managed to get one step ahead, with European governments and institutions reconfirming their commitment to the Euro project and beginning to put in place aggressive policy measures. While Euro dissolution risks may well resurface down the road, they are not likely to be significant over the next several months”

The yen to depreciate by as much as 10% in response to easier monetary policy from the BoJ”

China has successfully adjusted to a lower trend growth rate, and policymakers are driving a significant shift in income distribution towards households and away from businesses. While this means China will not play the same locomotive role globally, it will make Chinese expansion more politically as well as economically sustainable and the global economy less exciting but more stable.

A more limited scope for returns in emerging markets equities generally, given limited prospects for growth acceleration (and for western investors) the issue of FX appreciation

Conclusion -

Though investment-auto-motives does not shy away from being contrarian where necessary, so as to present a more insightful interpretation, the present state of global economic affairs, given what has been a troubled long-haul since 2008, does indeed to offer very real green shoots of confidence.

Confidence for the benefit of forward-thinking, powerful regional and global investors, who themselves recognise the re-orientation of the international investment landscape; one which for the first time in a long time, favours the West and general Triad region, having seen a massive deflationary effect in the US , Europe and still ongoing in Japan, the 'bottoming-up' process now under-way.

An overall picture in which the West (Triad) becomes avowed to act as a ‘starter-motor’ for supply-side economics (acting in a similar manner to China over the previous 15 years) within which investors become the arbitors of renewed socio-economic improvement. This achieved through a new belief in those large cap multi-national companies, national SMEs and local start-ups which are seen to be well positioned. Those best placed, to not only draw conventionally from B2B and B2C product and service markets, with well aligned and improved offerings, but also able to recognise the importance of creating their own internally synergistic internal and locally external ‘mini-economies’(similar to Indian conglomerates). So able to intelligently combine both profit-seeking shareholder interests and the social cohesion of employees and their immediate locale.

EM nations – many beyond that possibly patronising name - continue to ride the economic miracle experienced in the West during the 20th century. The BRICs and CIVETS having formed close economic ties, possibly at the increasing expense of relations with notionally ‘advanced nations’. The first decade of this century questioned whether EM nations had indeed de-coupled from advanced nations, their ability to withstand the 2008 crisis, the creation of 'detached policy' unquestionably demonstrating their new standing.

This new EM-centricism perhaps best exemplified by China’s recognition that it must maintain its own economic success by (re)turning inward to better economically serve its massive 1.6bn populace. As its ASEAN and EM counterparts climb the value-curve in products and services so China will continue to increasingly 'de-couple' through absorbed technological, capital markets and sociological learning. But expected to keep close relations with a chosen few triad nations who are truly advanced; so re-creating the Western miracle in its own image. Rabid supply-side over-investment leaving state-backed companies overtly 'fat', and the immature financial pipelines giving a large shadow-banking problem (with increased corporate bond defaults) are being learned. Hence a new era of muted structural change under new conservative leadership of Xi Jinping to appear in the mid-term directed at improving the wealth of the masses.

But such a monumental shift in the fundamental wealth creation model, whilst very good news for continued privatisation and the capitalist ethic, is bound to reduce the momentum of the Chinese economy (and possibly dependent ASEAN counterparts) from the heady 9-10% of yesteryear, with even 8% appearing over optimistic; 5% to 6.5% perhaps a more realistic expection.

This infers then that a notionally de-coupled global economy may well over the next decade stay that way, resulting in relatively more regional econo-centricism as the global tribes seek to secure their own place in the world once again by re-strengthening their own nations and regions, a large proportion of investment liquidity flowing 'internally', and the levels of foreign direct investment buoyed more so from the QE effect rather than old style outward bound opportunism. 
Here and now 2013 appears far better prospect than at any time over the last 5 years, easily said, but investment attitudes truly appear to be switching from a 'binary' risk-on/risk-off, to something far more intelligent that allows the practice of logical investing to once again reign.
However, the expected heavier retraction in China will give cause for greater focus on Western macro and micro fundamentals...and about time too!