Australia & the World on two pages – March 2013

Financial markets have lifted as confidence in the global growth outlook has firmed but late 2012 data for world exports and industrial output remained soft, showing modest expansion in activity at best.

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Global: Financial markets have lifted as confidence in the global growth outlook has firmed but late 2012 data for world exports and industrial output remained soft, showing modest expansion in activity at best. GDP fell at the end of last year in Western Europe and Japan, was flat in the USA, while the pace of growth in some of the biggest emerging market economies was sluggish by their standards. Business surveys suggest that conditions are expected to improve in several of the most important advanced and emerging economies (notably the US, Germany, Brazil and India). We expect growth to increase modestly this year, held back by ongoing weakness in the Euro-zone, followed by a more size able acceleration in 2014.

  • Share markets have risen strongly since late 2012 and by the end of February they were over 10% above their levels of last November. The amount of financial market volatility has fallen substantially. Commodity markets have not shown quite the same degree of optimism. There are probably a number of factors driving this disconnect – market perception that the “tail risk” of really bad outcomes like a Euro-zone collapse has been reduced, leading to a relief “risk-on” rally; the injection of liquidity by global central banks which is driving up financial asset prices and lowering spreads across many markets and, finally, the equity market looking forward to an upturn in the global economy that will lift earnings.
  • Although economic conditions were far from strong through the latter half of 2012, there was a modest acceleration in the pace of global growth toward the end of the year. Industrial production rose by 0.8% in December quarter, up from the 0.3% seen in September quarter. However, global industrial output rose by only 3.4% in 2012, one-third of the pace seen in 2010, with output flat for much of the year. The slowdown in world trade has been even more marked – from growth of 15% in 2010 to just over 2% in 2012. The soft patch seen in global activity through the middle of last year resulted in an increase in the amount of idle capacity in the big advanced economies; the G7’s unemployment rate has been around 8½% since early 2011 with a fall in the US jobless rate offsetting higher unemployment in the Euro-zone.
  • Growth in the advanced economies was disappointing in late 2012; output fell in the Euro-zone, UK  and Japan and was just about flat in the US. By the end of 2012, output in the big advanced economies was less than 1% above its year-earlier level and recessions seemed to be under way across Japan and the Euro-zone. This poor result follows a prolonged period of weak economic performance in the advanced economies. North America is the only region among the big advanced economies where GDP has convincingly climbed above its pre-crisis level. Elsewhere, real GDP remains below its early 2008 level with, in late 2012, GDP standing 3% below its pre-GFC level in the UK and Euro-zone and around 2½% below in Japan.
  • The slowdown in global growth through 2012 was not just caused by weaker conditions in the big advanced economies. There was also a softening through much of last year in the pace of economic expansion across several important emerging economies. Brazilian GDP grew by only 1% in 2012, Indian GDP expanded by just over 5% last year – the slowest for around a decade – and Chinese growth was slowing until it started picking up in late 2012. Chinese industrial output began growing faster towards the end of last year but sentiment has suffered recently as tighter policy on housing is again being announced.
  • The export oriented economies of East Asia and Latin America outside Brazil also saw a sharp slowdown through much of 2012 but conditions started to stabilise or even improve toward the end of last year and into early 2013.
  • The national business surveys across the big advanced economies are pointing to an upturn in activity. Global growth is forecast to accelerate from the latter half of 2013 as activity finally starts to recover in Western Europe and Japan alongside the quickening in growth in the emerging market economies. Year-average growth is only expected to rise from 3% in 2012 to 3.3% in 2013 before climbing to 3.9% in the following year. The contribution of the big advanced economies to global growth over the period 2012 to 2014 has risen from 0.6% points to 1.2% points. The bulk of global growth is, however, still expected to come from the emerging market economies.

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