Global: Our global forecasts remain little changed at 3.3% in 2013 (was 3.2%) and 3.9% in 2014. Renewed Euro-zone instability has taken a toll on global equity markets, which had strengthened quite markedly since late 2012, especially when compared to global economic activity and commodity markets. While latest data on world trade and industrial output is far from strong, it is a little better than the virtual stagnation shown through much of 2012. Business surveys in the advanced economies also show a lift in sentiment over future output. The pick up in 2014 reflects expectations that recession ends in Europe, Japan reflates and the big emerging market economies gather speed.

• The protracted and confusing process of dealing withCyprus’ banks eroded financial market confidence in late March and the decision to “bail-in” depositors has only added to confusion. Is this a “one off” tax on deposits or a new template for Euro-zone handling of crises? The extent of the damage done to global equity prices from this Euro-zone crisis has been quite limited. The previous upward market trend was arrested as several big equity markets levelled off but they did not fall. In addition, the aggressive monetary measures announced by the Japanese central bank have resulted in a large increase in local equity prices. Aggregate commodity prices are trending lower, suggesting that global demand is not growing particularly strongly.
• Behind the volatility in monthly data, there has been a gradual improvement in some key measures of global economic growth through late 2012 and early 2013. World trade volumes rose to 1.3% over the three months to January, up from 0.9% in Q4 2012 and 0.2% in Q3 2012. The same pattern is evident for industrial output. The sluggish performance of growth across many of the biggest economies in the world has resulted in substantial amounts of idle capacity (around 20% of G7 industrial capacity is lying idle) and still high unemployment.
• Global CPI inflation is running at around 2% yoy and producer price inflation is down to around 1% yoy. There are still big economies where inflation remains a major policy problem, notablyIndia,BrazilandSouth Africa. In the big advanced economies, however, despite all the concern expressed about central bank quantitative easing, inflation remains low.
• Revised national accounts numbers show that the level of economic activity in theUSandJapanin late 2012 was not as weak as initially feared. Real GDP fell in theUKand the Euro-zone but it increased very slightly in theUSandJapan. The overall performance of the big advanced economies through their recovery from the 2008/09 recession has been weak by the standard of many previous upturns in the post-war period, with quarterly growth in the G7 economies slowing from around ¼% in Q2 and Q3 2012, to a quarterly rate of -0.15% by the end of last year.
• The emerging market economies experienced a slowdown in the pace of growth through 2012.IndiaandBrazilexperienced a marked softening and their situation was further complicated by high inflation. Indian CPI inflation reached double digit rates at the end of 2012 and into early 2013 while the Brazilian CPI was up by around 6½% yoy in early 2013, well above the central bank’s target rate.Chinahas fared better than the other two big emerging economies – growth has been better maintained, improving towards the end of last year, and inflation has fallen.
• The export oriented economies of East Asia and Latin America outside of Brazil also saw a sharp slowdown through much of 2012 but conditions started to improve toward the end of 2012 and into early 2013. The upturn in industrial output and exports has been most marked inEast Asia.
• Overall we have not changed our core global forecasts. For the US we have slightly revised up our 2013 forecasts to 2.4% (was 2.2%) on the back of better consumer and investment outcomes in Q1 and an on going house price improvement. The reality however Europe is that Europe will be in recession till late 2013 and Japan, despite policy initiatives is still likely to only grow by around 1% in 2013. Only China is more clearly on a stronger path. For 2014 the return to global trend growth reflects our view that Europe and the UK will by then be growing – albeit moderately, with the USA and especially Japan benefiting from easier monetary policy. China on the other hand is expected to maintain its current growth path – which in turn will benefit Non Japan Asia.

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• Australian & the World on two pages – April 2013 (PDF 64 KB)