The Global Economy In 2013 – Selected Benchmarks

By M. Isi Eromosele

The year 2012 was challenging for the world economy – the U.S. economy suffered from continued uneven and slow growth, Japan was yet to recover from a devastating earthquake and Europe’s sovereign debt crisis deepened.

Despite these shocks, a strong growth performance in emerging markets enabled the global economy to expand by 2.7 percent in 2012, a pace expected to continue in 2013, as a rebound in China’s growth and a continued recovery in the US economy offset a likely recession in Europe.

The Global Economy

2013 will see the turning point in the European sovereign crisis. Recent events have seen dramatic political shifts in the peripheral Euro zone nations, especially Greece and Italy, which should boost reform and, ultimately, ensure that the region emerges stronger and more stable. The situation in Greece is stabilizing and the changes now being made should remove the country from the spotlight.

Italy is where the key risks and challenges lie. The country is solvent: Italy has significant economic potential, low private sector debt, the highest household wealth among the G7 and a record of delivering surpluses during the past decade.

The key challenge going forward will likely be the ability of politicians to push though growth-enhancing reforms in order to unlock Italy’s potential.

Spain has demonstrated a strong commitment to adjustment, and Ireland’s advances in competitiveness have turned around market sentiment. Ireland has doubled its trade surplus since 2008 and robust export performance has more than made up for the weakness in the domestic economy.

The Euro Zone

The Euro zone economy is till fragile and may slide into another recession which at best will be mild and last only for a couple of quarters. While the fiscal austerity measures and reforms being put in place are necessary for the peripheral economies to regain market confidence and restore competitiveness, they will likely have a negative impact on growth.

Growth will also suffer from the acceleration in bank deleveraging that Basel III regulations will require in 2013.  Eurozone growth will decline to 0.6 percent in 2013 from 1.5 percent in 2012. Even the data out of Germany has turned down recently.

The European Central Bank (ECB) will continue reversing the interest rate hikes of 2011 and see another 25bp cut later in the New Year. The ECB will continue buying peripheral country bonds, albeit at a measured pace and to keep its various liquidity taps open.

The United States economic recovery is holding, albeit slowly, after a surprisingly weak last quarter of 2012. There has been a clear improvement in the economic data in the past 2 months, with consumers showing surprising resilience and firms maintaining a decent level of investment.

The United States

The U.S. economy will strengthen further in 2013, as some of the headwinds from Europe abate, credit growth picks up and the housing market stabilizes. The Federal Reserve has also signaled that it will leave its official interest rates close to zero through to mid 2013 at least, providing further support to the economy.

Key risks facing the U.S. economy are that Congress fails to agree to stem some of the near-term fiscal drag (2% of GDP in 2012) and, more importantly, that it fails to agree on longer-term deficit reduction measures in the longer term to avoid a more serious downgrade by ratings agencies.

China

There has been much uncertainty and speculations recently about the other motor of the world economy – China. Although the risks from the property, banking and small business sectors are overstated, China’s growth will slow to an annualized 7 percent around the turn of the year.

The Chinese economy will avoid a hard landing, however and the nation’s growth will accelerate to almost 9 percent by H2 2013. Inflation is now falling sharply but do not expect a major policy stimulus to follow as a result.

The government is likely to launch targeted measures in some parts of the economy instead.

Emerging Asia

The rest of emerging Asia will see a slowdown in growth but, again, no hard landing, as real interest rates are low and domestic demand is still robust. The landing could be a little harder in a few economies as rapid property price increases and high credit growth potentially reverse in 2013.

But while authorities have already shifted policy away from combating inflation, as with China, don’t expect major policy relaxation unless the growth or inflation outcomes are significantly lower than have been forecast.

Japan

Japan, almost a year after its devastating earthquake and tsunami – which damaged global supply chains – have seen its economy contract by around 0.5 percent in 2012, not helped by a strong Yen.

Japan will see growth of just over 1 percent in 2013, helped by further postquake reconstruction spending by the government. But the strength of the Yen and the crisis in Europe could turn out to be a bigger drag on the economy if policymakers do not implement the right measures.

Overall, expect growth in 2013 to hold up reasonably well. If the threat of a systemic event in Europe fades in the early part of the year, 2013 could offer significant upside potential for risk assets.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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