Australia & the World on two pages – July 2013

Equity and currency market volatility reflects uncertainties over the pace at which the Fed might alter US monetary policy, Chinese authorities might clamp down on shadow banking and the potential impact of the Bank of Japan’s move to greater monetary easing.

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Equity and currency market volatility reflects uncertainties over the pace at which the Fed might alter US monetary policy, Chinese authorities might clamp down on shadow banking and the potential impact of the Bank of Japan’s move to greater monetary easing. Recent industrial and trade data plus business survey readings show slightly better activity outcomes in big advanced economies but growth in India and Brazil remains disappointing and there are growing concerns that China might be unable to manage a smooth transition to slower more consumer-led economic growth. After two years of growth around 3%, we still expect global growth to move back to trend in 2014.

  • There was previously a disconnect between sluggish global growth and the big rise in equity values, rationalised by a flood of central bank liquidity boosting investor appetite for higher yielding assets and risk. Recently this has reversed with G7 equity markets falling at the time when there are some brighter signs for their growth outlook. This reflects the fear that there will be less central bank liquidity injected to support asset values as the economic situation improves. The withdrawal of central bank stimulus from global economic activity should be a long and gradual affair – the Fed’s likely timetable would not see an end to QE until next year with no rate rises until 2015 and the Japanese central bank has ramped up its stimulus.
  • Global industry and trade experienced a marked slowing in growth through the last couple of years. By the early months of this year global industrial production and trade volumes were both growing below 2% yoy, a sub-trend outcome. Comprehensive figures on global activity show a mixed picture – the momentum of industrial growth seemed to be picking up slightly through the closing months of 2012 and early 2013 but world trade growth remained very weak. This modest up-tick in industrial growth was centred on the previously weak advanced economies with growth in the emerging economies still slowing. More recent – but less comprehensive – data suggest that activity continued to strengthen through May and June. The sluggish pace of economic expansion combined with the overhang of unemployment and idle capacity left from the deep recession of 2008/09 has led to very little inflationary pressure around most of the world, enabling central banks to keep interest rates down.
  • Growth remains subdued in the big advanced economies with output growing by only 0.4% in the March quarter. Continental Europe remains the worst performing area, while the US remains one of the best performing big advanced economies with moderate expansion continuing. The UK and Japan have experienced a prolonged period of weak demand and there are finally signs that conditions are improving. The performance of the Japanese economy is attracting particularly close attention as investors assess the impact of “Abenomics” – the combination of monetary and fiscal easing plus reform intended to end deflation and boost growth. Yen depreciation will boost exports, output and profits as well as help re-start inflation but getting sustained recovery requires a broader upturn in domestic demand.
  • The three big emerging market economies of China, India and Brazil are still driving our 3% global growth forecast for 2013 but they too have experienced a slowdown. This reflects the lagged effects of past policy tightening and sluggish global trade. There is clear evidence of a major slowdown in Chinese exports but domestic market oriented measures of demand still show solid growth. Market anxieties focus on the problems of fast credit growth and the shadow banking system and the dangers of financial instability and policy error by authorities. We have lowered our 2013 and 2014 Chinese GDP forecasts to 7½% and 7¼% respectively.
  • The export oriented economies of East Asia and Latin America also experienced a sharp slowdown through 2011 and 2012 with a period of renewed softness in the last 6 months.
  • While recent activity trends have been generally disappointing, firms in most of the big advanced economies remain optimistic that things will improve. Our measure of current trading conditions in these big advanced economies shows a sizeable improvement in sentiment in June and there is still plenty of optimism that demand in the big advanced economies will recover through 2014. We expect global growth to remain fairly sluggish through much of 2013 with the full-year figure staying around 3% before strengthening to 3¾% in 2014. The contribution of the big advanced economies is expected to increase as Euro-zone recession ends and Abenomics lifts Japanese growth.

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