Global: Financial markets have lifted as confidence in the global growth outlook firmed but late 2012 data for world exports and industrial output remained soft, showing modest expansion in activity at best. Central bank action in the Euro-zone, US and Japan has boosted market hopes of sustained growth by removing tail risks like a Euro-zone break-up or premature US interest rate rises. While the forecast global upturn is initially modest as activity is held back by weak conditions in Western Europe and Japan, things look brighter for 2014 with global growth predicted to finally rise above trend. The emerging market economies are still driving most global output expansion through the forecast period but a broad-based, albeit fairly modest, upturn should start later this year across the developed economies.

• Share prices have risen by around 10% from their mid-November lows in the major developed economies, Australia included. Other financial indicators also show much better conditions with the VIX index of market volatility back down at levels last seen in mid-2007 and a big fall in the Swiss franc, a safe haven currency. Commodity markets have not shown much of a trend in the last few months. From a local perspective however iron ore prices have jumped significantly – albeit that appears to be temporary. This “risk on” mood in the markets owes more to their greater confidence in the economic outlook than to current economic conditions.
• The lack of momentum in the global economy is evident in the recent data on trade and industrial output. According to CPB data, the volume of world exports was flat in the three months to October, following a rise of only 0.1% in the September quarter. The picture is much the same for global industrial output. The weakness in global growth and the absence of a trend in commodity prices has fed into a big drop in inflation, with producer price inflation in the OECD falling from over 6% yoy in the latter half of 2011 to less than 1% yoy in late 2012.
• Recovery from the deep recession of 2008/09 has remained disappointing in the big developed economies. Output in the G7 in September 2012 was barely above its early 2008 level and the US is the only big economy where real GDP is clearly well above its pre-recession level. Our weighted measure of national trading conditions from business surveys show a subdued picture for the developed economies for the closing months of last year. Nevertheless, sentiment over future trading conditions has improved recently, reflecting a lift in US sentiment and less negative business expectations across Western Europe.
• Conditions finally seem to be on the mend for several of the key emerging markets. Chinese economic growth increased to 7.9% in the December quarter, from 7.4% in the previous quarter. Indian economic growth proved disappointing in the September quarter, at 5¼% yoy.  However, the business surveys have finally turned up and some of the monthly partial indicators look to have bottomed out. The prospect of rate cuts should boost activity through 2013 with fiscal slippage and political uncertainty posing the key risks that threaten the expected upturn. Brazil experienced a very sharp slowing through 2012, but while lower interest rates and government fiscal measures are intended to speed up growth, the recovery will be slowed by much higher household debt.
• After recording a long steep descent, monthly growth data for industrial output and exports has finally stabilised or even turned up slightly in the Asian Tigers and Latin America. The latest business surveys in export-oriented economies like South Korea, Thailand and Taiwan have stopped falling or improved slightly, suggesting that firms also think the worst is now over.
• While we are expecting only a modest recovery in the pace of growth in 2013 – with global GDP set to expand by 3.3% yoy after last year’s 3.1% – growth looks set to rise above trend through 2014. The emerging market economies will continue to drive most of this upturn and should contribute over 2% points of 2013’s global expansion in 2012 but the coming back in growth predicted for the developed economies in 2014 lifts their contribution in the out-year to 1.2% points, a relatively good outcome. The main changes in the forecasts are an upward revision to Japan, to take account of the weaker yen and government fiscal stimulus plans, and an upward revision in China as authorities look to have managed a soft landing. The main risks that hang over this pretty reasonable looking global outlook relate to US fiscal policy, and risks surrounding prolonged austerity in the Euro-zone.

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Australia & the World on two pages – January 2013 (PDF 64KB)