Outlook For Global Equities 2013

By M. Isi Eromosele

U.S. Equities

Despite ongoing skepticism, the outlook for earnings looks good and expect them to grow by 7 percent in 2013. S&P 500 earnings per share (EPS) recovered to near trend levels in Q2 2012, and then grew robustly in Q3, making them the one clear element that has exhibited a classic V-shape in this economic recovery.

With a baseline of slow GDP growth , sales will continue to grow significantly faster in 2013, as is typical in economic recoveries, with margins remaining well supported.

True, the multiple remains within its historical one standard deviation band of 10 to 20 but it is 30 percent below fair value in our estimation. So will the multiple continue to de-rate in 2013 and fall to the bottom or below these bands? Or will it rise toward fair value?

There are a host of reasons why the multiple will remain low. These include the lack of investor demand for equities when 10-year returns are near zero; an ageing population which is raising the relative demand for fixed income; the unsustainability of earnings made by cost cutting and cyclically high margins; a higher uncertainty premium with potentially more frequent business cycles; macro policy uncertainty and sovereign debt risks.

However, there are reasons to be optimistic on prospects on for the multiple in 2013. These include:

• A U.S. recession is unlikely. Recessions typically happen late in economic cycles when companies are over-extended and cost pressures rampant. With recovery from the last recession far from complete and companies still running lean, the initial conditions for widespread cutbacks – a central part of previous recessions – is absent.
• Labor cost inflation will remain benign. Elevated unemployment will continue to restrain labor costs which represent 70 percent of firm costs. Just released data reinforce this read: real GDP growth of 2.5 percent on a seasonally adjusted basis, nominal of 5 percent, while unit labor costs fell by 2.4 percent.
• Rising dividends. A notable development of late has been the large number of firms instituting or raising dividends. As long as equities remain cheap and corporate cash flows strong, dividends will continue to be raised. Investors have been paying a premium for high dividend stocks and an overall increase will support the market multiple.

All in all, therefore, the outlook is good on prospects for US equities in 2013.

The recommendation is to overweight the domestic cyclical sectors (financials, industrial, tech, discretionary) versus defensives (staples, healthcare, telecoms, utilities). The domestic cyclicals massively underperformed the defensives in 2012 from February through the early October bottom in equities, but have been recovering strongly with the market.

European Equities

The key question for investors in European equities is whether to switch from the defensive stocks that have served them well in the global crisis to cyclical stocks.

Classic defensives such as Nestlé are  on PE multiples of 17 times or so while some cyclicals such as Rio Tinto are trading at just eight times.

The difference between the PE multiples of defensives and cyclicals is now more than 6.5 times, the same margin as the final quarter of 2008 when the global crisis was at its height. The time is now right to make the switch to cyclicals.

First, the threat of a global recession is easing with the US economy looking healthier and Chinese risks looking less negative than before.

Though there have been flat to modestly softer margins, this does not pose a significant threat since the bulk of the increase in margin expectations since 2010 have not been priced into the market because of concern over their sustainability.

Second, debt levels at many European companies are low and cash levels are high so there is scope for dividend increases and/or buybacks and special dividends. Buybacks in the U.K. for example should finish 2013 at more normal levels (1 percent of market cap).

The preference for cyclicals does not extend to financials, however. While banks look cheap and may recover in the short term, they face a headwind of weaker Eurozone growth, dividend cuts and question marks about their long-term returns.

The downside risks are especially pronounced in France and Italy where an avoidance of consumer related stocks in general also seems sensible. Stocks with a high exposure to government spending are another subset of domestic stocks that continues to look vulnerable.

The best opportunities will be found in globally exposed cyclicals which sold off dramatically in the summer of 2012 and now look undervalued. It is important to remember that European stocks are not plays on whether or not there is a solution to the sovereign debt crisis.

Underweighting or overweighting Europe relative to other regions is really about global growth and whether European stocks are a cheaper route into that growth.

Asian Equities

Asian equities are likely to underperform developed market equities in 2013 just as they did in 2012. While bouts of reflationary expectations in the US, Europe and especially China are likely to lead to periodic rallies, the underlying dynamics in Asia are challenging.

A focus on large-cap stocks with inexpensive valuations (especially dividends), solid balance sheets and analyst support is the way to generate relative returns. Countries that have underinvested – Korea, Thailand and the Philippines – have pockets of value.

Growth investors should focus on the projected growth in middle-aged and older folks in Asia – financial services (not banks), luxury goods, travel and entertainment and upper-end healthcare look promising.

The expected contraction in youth cohorts (except in India and the Philippines) is likely to pose a challenge to technology and internet stocks. A more disorderly slowdown in China, a consequence of a policy error, is likely to pose a threat to the decade long bull market in base materials and industrial cyclicals.

There are three key reasons why Asian equities are likely to underperform developed market equities.

• First, Asian equities have little or no valuation advantage over developed equities. As an example, the free cash flow yield for the four key regions. Asia ex-Japan has paltry FCF yields of around 3 percent, compared with 6 percent each for the US and Japan, and 9 percent for Europe.
• Second, the relationship between nominal GDP growth and EBIT margins has broken down around the world. Spain and Italy have higher EBIT margins than most of the ‘growthy’ emerging markets.
• The third key reason is the fact that the US dollar is at its lowest levels since the breakdown of Bretton Woods. Any rise in the USD versus a basket of currencies is normally bad for Asian/emerging market equities.

So, both on a cyclical and structural basis, Asia’s margin power is likely to suffer this year. This problem is likely to turn acute in China, where the productivity of incremental credit expansion is falling and poor investment is already leading to an erosion in profit margins.

Only a world-record beating rise in sales growth (compared to the asset base of firms) or a rise in financial leverage can mitigate the decline in profit margins.

A global reflationary package, monetary or fiscal, would likely lead to a rally in Asian equities. A reflation in China would be especially powerful for regional equities. A shift from bonds into equities by institutional investors, attracted by relative valuations would also be beneficial to Asian equities.

Domestic pension funds in the region are severely under-invested in the equity asset class and a policy or regulatory shift here would have a substantial positive impact. A drop in regional inflation, would lead to lower interest rates and be helpful to Asian equities.

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

Copyright Control © 2013 Oseme Group

Africa 2013: The Next Economic Frontier

By M. Isi Eromosele

Capital market development and economic growth tend to go hand in hand and the prospects for the latter look relatively bright in Africa during 2013.

There are eight strongly-performing economies in sub-Saharan Africa that seem to offer the strongest potential for foreign investors. The list comprises Angola, Ghana, Kenya, Nigeria, Senegal, Tanzania, Uganda and Zambia, which make up 45 percent of the region’s population and 61 percent of its economic activity.

Over the past decade, growth in these eight frontier sub-Saharan markets has accelerated to 6.6 percent from 3.0 percent over the previous two decades and is set to be sustained at close to these levels over the next five years.

This matches the 6.6 percent expansion in the BRICs, tops the 4.9 percent growth seen in the rest of emerging Asia and is well in excess of growth of around 3.5 percent in South Africa.

While frontier markets in North Africa also offer potentially attractive returns over the longer term, uncertain political transformations are likely to weigh on confidence and economic activity for many months to come. For the year ahead, therefore, growth prospects south of the Sahara are better.

As in other emerging regions, African economies have been buffeted by headwinds from the global financial crisis over the past four years. But in contrast to past global slowdowns, Africa has not been left behind as the current global recovery has unfolded.

In part this reflects improved policies that have been put in place. Most countries in the continent have done a better job in recent years of banking the dividends from stronger economic growth.

Foreign reserves have increased and debt levels have been reduced, helped in some cases by debt relief from official creditors. These buffers enabled many countries to ease policies during the recent downturn.

Stronger linkages with China and other rapidly growing markets have also added impetus to growth. Almost half of sub-Saharan African exports now go to emerging and developing markets compared with less than one-quarter in 1990 with China alone accounting for about 17 percent of the region’s trade.

In some respects, this is just another manifestation of the secular boom in commodities resulting from the rise of emerging markets over the last decade. Africa’s abundance of natural resources makes it an obvious beneficiary of this super cycle. But growth has also been strong in countries that do not depend so heavily on commodity exports, such as Tanzania and Uganda.

This year is likely to provide difficult challenges for global markets and African economies will also need to overcome their share of these. Low incomes, rapidly growing urban populations, ethnic divisions, pervasive corruption and long histories of armed conflict continue to leave some African countries susceptible to bouts

of social unrest and political tension.

Encouragingly, elections in 2011 in Nigeria, Uganda and Zambia, passed off smoothly. And polls in Ghana in 2012 further underscored the country’s already strong reputation for political stability.

Kenya’s elections, however, will be a significant test of its democratic credentials and ability, under a new constitution, to avoid a repeat of the protracted stand-off following the disputed 2007 elections, with all but the bravest of investors likely to remain sidelined until transition to the next administration is complete.

Inflation has accelerated to about 11 percent over the past four to five months from a low of 7 percent a year ago, reflecting rising international food and fuel prices and a reticence in some countries to roll back accommodative policies put in place after the last crisis.

In East Africa, these pressures have been exacerbated by a severe drought and weaker exchange rates, which have pushed inflation to 19 percent in Kenya, 17 percent in Tanzania and 31 percent in Uganda.

Central banks have responded with aggressive rate hikes in the last few months. This should help to restore macroeconomic stability and prop up their currencies, but is likely to hold back economic growth in the short term.

Africa’s exposure to commodity markets, which has driven its terms of trade to record highs, could also prove to be a double-edged sword. Global growth of much below 3 percent would likely be associated with weaker oil and industrial metals prices, which would be negative news for the region’s major oil producers, Angola and Nigeria, as well as Zambia, given its reliance on copper exports.

On the other hand, continued negative real interest rates in core markets may continue to provide support for gold, which could help to mitigate some of the negative effects of a global slowdown on Ghana and Tanzania.

Further ahead, the durability of the economic revival in Africa will also depend on how countries manage their commodity revenues. Nigeria’s recent experience has underscored that, if not appropriately managed, oil revenues can lead to wildly pro-cyclical spending patterns and macroeconomic volatility.

Going forward, there is optimism that the government in Nigeria will be able to rein in public spending, which, should in turn, bring some stability back to the foreign exchange market and pave the way for continued strong growth.

A new potential major economic force is Ghana, where new oil production is set to push economic growth up to about 14 percent, making it easily one of the fastest growing economies in the world this year.

Ghana’s framework for managing oil wealth has only recently been approved but includes several useful elements, including a strong emphasis on transparency and the creation of oil savings funds designed to insulate the economy against volatile movements in oil prices and to preserve some oil wealth for future generations.

Consistent implementation of this framework through both good and bad times should help to further lock in Ghana’s growing reputation as of one of the continent’s brightest long term prospects.

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

Copyright Control © 2013 Oseme Group

Risks Of Another Global Recession

By M. Isi Eromosele

Failure of policymakers, especially those in Europe and the United States to address the jobs crisis and prevent sovereign debt distress and financial sector fragility from escalating poses the most acute risk for the global economy in the outlook for 2012-2013.

A renewed global recession may be developing. The developed economies are on the brink of a downward spiral enacted by four weaknesses that mutually reinforce each other: sovereign debt distress, fragile banking sectors, weak aggregate demand (associated with high unemployment and fiscal austerity measures) and policy paralysis caused by political gridlock and institutional deficiencies.

All of these weaknesses are already present, but a further worsening of one of them could set off a vicious circle leading to severe financial turmoil and an economic downturn. This would also seriously affect emerging markets and other developing countries through trade and financial channels.

The Oseme baseline forecast assumes that the set of additional measures agreed upon by the EU in late 2011 will suffice to contain Greece’s debt crisis. The measures include a 50 per cent reduction of Greece’s sovereign debt, steps to recapitalize European banks and deeper fiscal cuts in Greece.

The Oseme baseline assumes this would help engender an orderly workout of the sovereign debt crisis in the Euro zone and prevent the Greek default from spreading to other economies and leading to a major collapse of banks.

For the United States, the Oseme baseline assumes that the Government will put in place a policy package that would provide some minor stimulus in the short run, while cutting Government spending and increasing taxes over the medium run.

The baseline further subsumes the policy commitments made by other Group of Twenty (G20) members at the Cannes Summit in France, held on 3 and 4 November 2011.

These reaffirm by and large existing Government plans, with the main emphasis on moving towards further fiscal austerity while sustaining accommodative monetary policies in most developed countries; and with continued focus on price stability through monetary tightening in major developing economies and those countries who are running large current-account surpluses enacting fiscal policies that promote more domestic-led growth.

The presumption of the Oseme baseline scenario is that the combination of these policies will allow developed economies to muddle through during 2012, but will be insufficient to catapult a robust economic recovery.

The risk is high, however, that these relatively benign baseline assumptions will prove to be overly optimistic. It is quite possible that the additional measures planned in Europe will not be effective enough to resolve the sovereign debt crisis in the region, leading to a disorderly and contagious default in a number of countries which will wreak havoc in the economies of the region and beyond.

The efforts to solve the sovereign debt crisis in Europe failed to quell the unease in financial markets during November of 2011 and fresh warning signs of further problems emerged as Italy’s cost of borrowing jumped to its highest rate since the country adopted the Euro.

Another sign of increasing financial distress was a jump in the Euribor-OIS, Europe’s interbank lending rate from 20 to 100 basis points, not as high as at the onset of the 2008 global financial crisis but high enough to cause concern.

A large number of banks in the Euro zone already stand to suffer significant losses, but contagion of the sovereign debt crisis to economies as large as Italy would no doubt overstretch the funds available in the European Financial Stability Facility (EFSF), put many banks on the verge of bankruptcy and trigger a worldwide credit crunch and financial market crash.  

Such a financial meltdown would no doubt lead to a deep recession, not only in those economies under sovereign debt distress, but also in all other major economies in the Euro zone, possibly with the intensity of the downturn seen in late 2008 and early 2009.

The political wrangling over the budget in the United States may also worsen and could harm economic growth if it leads to severe fiscal austerity with immediate effect. This would push up unemployment to new highs, further depress the already much shaken confidence of households and businesses and exacerbate the beleaguered housing sector, leading to more foreclosures which, in turn, would put the United States banking

sector at risk again.

Consequently, the United States economy could well fall into another recession. The United States Federal Reserve might respond by adopting more aggressive monetary measures, for example, through another round of quantitative easing; but in a depressed economy with highly risk averse agents, this would likely be less effective in terms of boosting economic growth than the measures taken in previous years.

A recession in either Europe or the United States alone may not be enough to induce a global recession, but a collapse of both economies most likely would. GDP of the European Union would decline by 1.6 per cent and that of the United States by 0.8 per cent in 2012.

This would constitute about one third of the downturn experienced during 2009. The scenario assumes that financial conditions would not escalate into a full-blown banking crisis with worldwide repercussions, but it also assumes some overshooting of the impact into the real economy, as was the case in 2009, allowing for a mild recovery in 2013, albeit with GDP growth remaining well below the baseline forecast.

Developing economies and the economies in transition would likely take a significant blow. The impact would vary as their economic and financial linkages to major developed economies differ across countries.

Asian developing countries, particularly those in East Asia, would suffer mainly through a drop in their exports to major developed economies, while those in Africa, Latin America and Western Asia, along with the major economies in transition would be affected by declining primary commodity prices.

In addition, all emerging economies would have to cope with large financial shocks, including a contagious sell-off in their equity markets, reversal of capital inflows and direct financial losses due to the declining values of the holdings of European and United States sovereign bonds, which would affect both official reserve holdings and private sector assets.

As a result, GDP growth in developing countries would decelerate from 6.0 per cent in 2011 to 3.8 per cent in 2012, that is, to almost half the pace of growth (about 7 per cent per year) achieved during 2003-2007 and about 3 percentage points below the long-term growth trend.

This growth deceleration would not be quite as big as in 2009 when the pace of developing country growth dropped by almost 4.5 percentage points), yet various regions would suffer negative per capita income growth, likely causing renewed setbacks in poverty reduction and in achieving the other Millennium Development Goals

(MDGs).

Growth of WGP would decelerate to 0.5 per cent in 2012, implying a downturn in average per capita income for the world.

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

Copyright Control © 2012 Oseme Group

Global Economic Environment For Emerging Nations

By M. Isi Eromosele

Net private capital inflows to emerging and developing economies increased to about $575 billion in 2011, up by about $90 billion from 2010 levels.

The recovery in capital inflows from their precipitous decline during the global financial crisis continued until the middle of 2011 but suffered a strong setback with the sharp deterioration in global financial markets in the third quarter of the year.

The current level of inflows remains well below the pre-crisis peak registered in 2007. As a share of GDP of developing countries, net capital inflows are at about half of their peak levels. The outlook for external financing will be subject to uncertainty owing to counteracting forces during 2012 and 2013.

On the one hand, continued sovereign debt distress in developed economies will sustain the present uncertainty and volatility in global financial markets and this will likely deter portfolio capital flows to emerging economies.

Uneven Private Capital Flows

Deepening of the sovereign debt crisis may lead to more capital being pulled back for deleveraging of financial institutions in developed countries or in a search for safe havens (such as dollar or Swiss franc denominated assets), as was the case during the financial turmoil of the third quarter of 2011.

On the other hand, higher growth prospects for most emerging economies (despite the downgraded forecast) will likely attract more foreign direct investment (FDI), while interest rate differentials will continue to favor lending to emerging economies even if the risk premiums for some of these economies rise further, a trend already visible in the second half of 2011.

Short-term portfolio equity flows to developing countries went declined in the second half of 2011. As a result, net inflows of portfolio equity to emerging economies in 2011 registered a decline of about 35 per cent from 2010 levels, exhibiting vivid proof of the high volatility these flows are subjected to.

International bank lending to emerging and developing economies continued to recover slowly from its sharp decline in 2009. In 2011, bank lending had recovered to only about 20 per cent of its pre-crisis peak level, as international banks headquartered in developed countries continued to struggle in the aftermath of the financial crisis.

Nonbank lending has been more vigorous, as both private and public sectors in emerging economies managed to increase bond issuance, taking advantage of low interest rates in global capital markets.

Net FDI remained the largest single component of private capital flows in 2011, reaching $429 billion, up by more than $100 billion from its 2010 level. Asian emerging economies received most (about 45 per cent) of the FDI inflows, followed by Latin America.

These estimates are net of FDI from emerging market economies, which continued to increase. China and a few other Asian developing countries further increased investments in Latin America and Africa, primarily destined towards sectors producing oil, gas and other primary commodities.

On balance, however, financial resources continue to flow out of the emerging and developing economies in large quantities as their accumulation of foreign exchange reserves have increased further. In 2011, emerging economies and other developing countries are estimated to have accumulated an additional $1.1 trillion in foreign exchange reserves, totaling about $7 trillion.

Volatility In Commodity Prices

Global prices of oil and other primary commodities continued to rise in early 2011, but declined in the third quarter. The pattern resembles that of 2008, although the reversal has not been as drastic.

Nonetheless, average price levels of most commodities for 2011 remained well above those in 2010, by between 20 and 30 per cent. The reversals since mid-2011 have been driven by four key factors: a weaker global demand for commodities resulting from bleaker prospects for the world economy, positive supply shocks in a number of markets, a sell-off in markets for financial commodity derivatives that occurred in concert with the downturn in global equity markets and an appreciation of the United States dollar.

In the outlook, the prices of most primary commodities are expected to moderate by about 10 per cent in both 2012 and 2013, consistent with the forecast of weaker global economic growth. It is to be expected, however, that commodity price volatility will continue to remain high.

Brent oil prices averaged $111 per barrel in the first half of 2011, compared with an average of $79 for 2010 as a whole (figure I.7). The surge was mainly driven by the political unrest in North Africa and Western Asia which caused disruptions in oil production, especially in Libya.

However, oil prices dropped sharply in the third quarter of 2011 amidst weakening global demand, the anticipated resumption of oil production in Libya as well as a rebound of the exchange rate of the United States dollar.

In the outlook for 2012, demand for oil is expected to weaken because of slower economic growth in developed countries. Yet, total demand is expected to remain sustained because of the increased energy needs of developing countries, as well as the restocking of oil inventories.

Oil production is expected to resume progressively in Libya, while Saudi Arabia may keep its production at the current level. However, the continued geopolitical instability in North Africa and Western Asia is likely to keep the risk premium on oil prices elevated.

The Brent oil price is expected to decline by 6 per cent to $100 per barrel in the baseline forecast for 2012 and to continue to fluctuate around that level in 2013. Nonetheless, price uncertainty and volatility will remain high because of the influence of financial factors.

These include, in particular, fluctuations in the value of the United States dollar and unpredictable trends in financial derivatives’ trading in commodity markets.

After sliding considerably in the first half of 2010, world food prices have risen sharply, peaking around February 2011. Despite subsequent falls, prices remain comparatively high.

The average price of cereals during the first nine months of 2011 was about 40 per cent higher than that recorded over the same period of 2010. Despite similar swings, meat, vegetable oils and sugar prices have also been on the rise.

The impact on food-dependent developing countries has been considerable, but variable. A famine caused by prolonged droughts was declared in the Horn of Africa, but other countries in Africa enjoyed good harvests of maize and sorghum.

Generally speaking, however, higher food prices have been an important factor in the high inflation of many developing countries, or a cause of additional fiscal burdens where the impact was mitigated by food subsidies.

In the outlook, food prices may moderate somewhat with the global downturn and expected good harvests for a number of key crops (including wheat). Yet, prices are likely to remain volatile as food markets remain tight and any adverse supply shock could induce strong price effects. Continued uncertainty in financial markets can also be expected to exacerbate commodity price volatility.

World Trade Growth

World trade continued to recover in 2011, albeit at a much slower pace than in 2010. After a strong rebound of more than 14 per cent in 2010, the volume of world exports in goods decelerated visibly to 7 per cent in 2011.

The level of total world exports had fully recovered to its pre-crisis peak by the end of 2010, but it is estimated to be still below the long-term trend level by the end of 2011. As has been the case with the recovery of WGP, developing countries, particularly Asian economies with large shares in the trade of manufactured goods led the recovery.

While the level of trade in volume terms has already far surpassed the pre-crisis peak for developing countries as a group, the trade volume for developed economies has yet to recover fully from the global crisis.

Commodity-exporting emerging countries experienced a strong recovery in the value of their exports in the first half of 2011, owing to the upturn in commodity prices, but saw little growth of export volumes. Some of the value gains were lost again in the second half of the year with the downturn in key commodity prices.

In the outlook, the volume growth of world trade is expected to moderate to about 5.0 per cent in 2012-2013. The dichotomy between a robust growth in trade in emerging economies and a weak one in developed economies will continue.

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

Copyright Control © 2012 Oseme Group

Prospects For The Global Economy: An Analysis

By M. Isi Eromosele

Following two years of anemic and uneven recovery from the global financial crisis, the world economy is teetering on the brink of another major downturn. Output growth slowed considerably during 2011, especially in the developed countries.

The baseline forecast foresees continued anemic growth during 2012 and 2013. Such growth is far from sufficient to deal with the continued jobs crises in most developed economies and will drag down income growth in developing countries.

A serious, renewed global downturn is looming because of persistent weaknesses in the major developed economies related to problems left unresolved in the aftermath of the Great Recession of 2008-2009.

The problems stalking the global economy are multiple and interconnected. The most pressing challenges are the continued jobs crisis and the declining prospects for economic growth, especially in the developed countries.

As unemployment remains high, at nearly 9 per cent, and incomes stagnate, the recovery is stalling in the short run because of the lack of aggregate demand. But, as more and more workers remain out of a job for a long period of time, especially young workers, medium-term growth prospects also suffer because of the detrimental effect on workers’ skills and experience.

The rapidly cooling global economy is both a cause and an effect of the sovereign debt crises in the Euro zone and of fiscal problems elsewhere. The sovereign debt crises in a number of European countries worsened in the second half of 2011 and aggravated the weaknesses in the balance sheets of banks sitting on related assets.

Even bold steps by the Governments of the Euro zone countries to reach an orderly sovereign debt workout for Greece were met with continued financial market turbulence and heightened concerns of debt default in some of the larger economies in the Euro zone, Italy in particular.

The fiscal austerity measures taken in response are further weakening growth and employment prospects, making fiscal adjustment and the repair of financial sector balance sheets all the more challenging.

The United States economy is also facing persistent high unemployment, shaken consumer and business confidence and financial sector fragility. The European Union (EU) and the United States of America form the two largest economies in the world and they are deeply intertwined.

Their problems could easily feed into each other and result in another global recession. Emerging countries, which had rebounded strongly from the global recession of 2009, would be hit through trade and financial channels.

The financial turmoil following the August 2011 political wrangling in the United States regarding the debt ceiling and the deepening of the Euro zone debt crisis also caused a contagious sell-off in equity markets in several major developing countries, leading to sudden withdrawals of capital and pressure on their currencies.

Political divides over how to tackle these problems are impeding much needed policy action, further eroding the already shattered confidence of business and consumers. Such divides have also complicated international policy coordination.

Nonetheless, as the problems are deeply intertwined, the only way for policymakers to save the global economy from falling into a dangerous downward spiral is to take concerted action, giving greater priority to revitalizing the recovery in output and employment in the short run in order to pave the way for enacting the structural reforms required for sustainable and balanced growth over the medium and long run.

Faltering Global Growth

Surrounded by great uncertainties, the Oseme Consulting baseline forecast is premised on a set of relatively optimistic conditions, including the assumption that the sovereign debt crisis in Europe will, in effect, be contained within one or just a few small economies, and that those debt problems can be worked out in more or less orderly fashion.

It further assumes that monetary policies among major developed countries will remain accommodative, while the shift to fiscal austerity in most of them will continue as planned but not move to deeper cuts.

The baseline also assumes that key commodity prices will fall somewhat from current levels, while exchange rates among major currencies will fluctuate around present levels without becoming disruptive.

In this scenario, growth of world gross product (WGP) is forecast to reach 2.6 per cent in the baseline outlook for 2012 and 3.2 per cent for 2013. This entails a significant downgrade (by one percentage point) from the Oseme Consulting baseline forecast of mid-20111but is in line with the pessimistic scenario laid out at the end of 2012.

The deceleration was already visible in 2011 when the global economy expanded by an estimated 2.8 per cent, down from 4.0 per cent in 2010. The risks for a double-dip recession have heightened.

In accordance with a more pessimistic scenario, including a disorderly sovereign debt default in Europe and more fiscal austerity, developed countries would enter into a renewed recession and the global economy could come to a near standstill.

More benign outcomes for employment and sustainable growth worldwide would require much more forceful and internationally coordinated action than that embodied in current policy stances.

Emerging countries and economies in transition are expected to continue to stoke the engine of the world economy, growing on average by 5.6 per cent in 2012 and 5.9 per cent in 2013 in the baseline outlook.

This is well below the pace of 7.5 per cent achieved in 2010, when output growth among the larger emerging economies in Asia and Latin America such as Brazil, China and India were particularly robust.

Even as economic ties among emerging countries strengthen, they remain vulnerable to economic conditions in the developed economies. From the second quarter of 2011, economic growth in most emerging countries and economies in transition started to slow notably to a pace of 5.9 per cent for the year.

Initially, this was the result, in part, of macroeconomic policy tightening in attempts to curb emerging asset price bubbles and accelerating inflation, which in turn were fanned by high capital inflows and rising global commodity prices.

From mid-2011 onwards, growth moderated further with weaker external demand from developed countries, declining primary commodity prices and some capital flow reversals. While the latter two conditions might seem to have eased some of the macroeconomic policy challenges earlier in the year, amidst increased uncertainty and volatility, they have in fact complicated matters and have been detrimental to investment and growth.

The economic woes in many developed economies are a major factor behind the slowdown in emerging countries. Economic growth in developed countries has already slowed to 1.3 per cent in 2011, down from 2.7 per cent in 2010 and is expected to remain anemic in the baseline outlook at 1.3 per cent in 2012 and 1.9 per cent in 2013. At this pace, output gaps are expected to remain significant and unemployment rates will stay high.

Most developed economies are suffering from predicaments lingering from the global financial crisis. Banks and households are still in the process of a deleveraging, which is holding back credit supplies.

Budget deficits have widened and public debt has mounted, foremost because of the deep downturn and to a much lesser extent, because of the fiscal stimulus. Monetary policies remain accommodative with the use of various unconventional measures, but have lost their effectiveness owing to continued financial sector fragility and persistent high unemployment which is holding back consumer and investment demand.

Concerns over high levels of public debt have led governments to shift to fiscal austerity, which is further depressing aggregate demand.

Growth In The United States

Growth in the United States slowed notably in the first half of 2011. Despite a mild rebound in the third quarter of the year, gross domestic product (GDP) is expected to weaken further in 2012 and even a mild contraction is possible during part of the year under the baseline assumptions.

Even as the total public debt in the United States has risen to over 100 per cent of GDP, yields on long-term government bonds remain at record lows. This would make stronger fiscal stimulus affordable, but politically difficult to enact in a context where fiscal prudence is favored and where the country has already been on the verge of defaulting on its debt obligations in August of 2011 because of political deadlock over raising the ceiling on the level of Federal public debt.

Failure by the congressional Joint Select Committee on Deficit Reduction to reach agreement in November of 2011 on fiscal consolidation plans for the medium term has added further uncertainty.

The uncertain prospects are exacerbating the fragility of the financial sector, causing lending to businesses and consumers to remain anemic. Persistent high unemployment at a rate of over 8.0 per cent and low wage growth are further holding back aggregate demand and, together with the prospect of prolonged depressed housing prices have heightened risks of a new wave of home foreclosures.

Growth In Europe Union

Growth in the Euro zone has slowed considerably since the beginning of 2011 and the collapse in confidence evidenced by a wide variety of leading indicators and measures of economic sentiment suggest a further slowing ahead, perhaps to stagnation by the end of 2012.

Even under the optimistic assumption that the debt crises can be contained within a few countries, growth is expected to be only marginally positive in the Euro zone in 2012, with the largest regional economies dangerously close to renewed downturns and the debt-ridden economies in the periphery either in or very close to a protracted recession.

Growth In Emerging Nations

Emerging countries are expected to be further affected by the economic woes in developed countries through trade and financial channels. Among the major emerging countries, China’s and India’s GDP growth is expected to remain robust, but to decelerate.

In China, growth slowed from 10.4 per cent in 2010 to 9.3 per cent in 2011 and is projected to slow further to below 9 per cent in 2012-2013. India’s economy is expected to expand by between 6.7 and 7.1 per cent in 2012-2013, down from 9.0 per cent in 2010.

Brazil and Mexico are expected to suffer more visible economic slowdowns. Output growth in Brazil was already halved, to 3.7 per cent in 2011, after a strong recovery of 7.5 per cent in 2010 and is expected to cool further to a 2.7 per cent growth in 2012.

Growth of the Mexican economy slowed to 3.8 per cent in 2011 (down from 5.8 per cent in 2010), and is anticipated to decelerate further, to 2.5 per cent in the baseline scenario for 2012.

Least Developed Countries

Low-income countries have also seen a slowdown, albeit a mild one. In per capital terms, income growth slowed from 3.8 per cent in 2010 to 3.5 per cent in 2011, but despite the global slowdown, the poorer countries may see average income growth at or slightly above this rate in 2012 and 2013.

The same holds for average growth among the category of the least developed countries (LDCs). Nonetheless, growth is expected to remain below potential in most of these economies.

In 2012, per capita income growth is expected to reach between 2.0 and 2.5 per cent, well below the annual average of 5.0 per cent reached in 2004-2007. Despite the high vulnerability of most LDCs to commodity price shocks, they tend to be less exposed to financial shocks and mild growth in official development assistance (ODA) has provided them with a cushion against the global slowdown.

Conditions vary greatly across these economies.  Bangladesh and several of the LDCs in East Africa are showing strong growth, while adverse weather conditions and/or fragile political and security situations continue to plague economies in the Horn of Africa and in parts of South and Western Asia.

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

Copyright Control © 2012 Oseme Group

Lasting Effects Of The Global Economic Crisis

By M. Isi Eromosele

While the current economic crisis has produced a significant impact on countries and regions around the world in various ways, the intensity of the impact differs from country to country and from region to region.

The global financial crisis has utterly upset the growth structure of the United States, its epicenter, as well as countries like the United Kingdom and Spain that had realized strong growth in domestic demand through an expansion of the housing market and consumption and an increase in the domestic credit market.

As a result, those countries have suffered serious recession, with housing investment and personal consumption declining sharply.

At the same time, export-oriented countries such as Japan and Germany, which depend heavily on external demand, including exports of consumer durable goods and capital goods to the United States and other Western developed countries that continued domestic demand-led growth were directly hit by the impact of the recession in these countries.

Their industrial production dropped sharply because of the combined effects of this decline in exports of final goods and a drop in exports of parts and intermediate goods to overseas production bases in Asia and Eastern Europe, and their economies initially contracted at an unprecedented pace, even more sharply than the U.S. economy, the epicenter of the crisis.

Conversely, although the economic growth of emerging economies such as China, India and Brazil was slowed down by a decline in exports, the impact of the crisis on them has been limited compared with the impact on developed countries because of the robust consumption and strong demand for infrastructure development that are typical features of emerging economies.

In addition, fiscal measures to stimulate consumption, including tax cuts and subsidies and credit easing measures such as interest rate cuts brought about some positive effects to these countries, as potential fund needs are generally strong there.

However, the situation is different for emerging economies in Eastern Europe, such as Hungary, that depend heavily on an inflow of foreign funds attracted by their high growth potential from European developed countries in order to meet the fund needs for achieving economic growth.

Many of the East European emerging economies have become unable to secure seed money for growth and plunged into serious recession. Among Asian emerging economies, Singapore, Malaysia, South Korea and Taiwan, all of which depend heavily on exports, were initially thrown into serious recession.

Besides being conspicuous for the extent and depth of its impact, the current crisis is also notable for having exposed the problems and weaknesses of the existing growth structures of countries and regions.

As a lesson of the crisis, priority should be placed on correcting these problems and weaknesses.

Economic Stimulus Measures And Their Effects

The United States, the epicenter of the crisis, adopted an economic stimulus package with expenditures totaling a record $787.2 billion over two years.

European countries implemed economic stimulus packages totaling 600 billion Euros. In addition, the European Commission decided to disburse 8.3 billion Euros from the European Structural and Social Funds and allocate 5 billion Euros each to infrastructure investment and support for research and development in the auto industry.

Japan implemented economic stimulus packages totaling ¥75 trillion (equivalent to 14.8% of GDP), and also allocated an additional ¥57 trillion yen for fiscal expenditures.

The stock markets around the world were the first to respond to the announcement and implementation of the series of huge economic stimulus packages.

After continuing to plunge for some time, U.S. stock prices have bottomed out and continued to rise since 2009 when the U.S. Department of Treasury announced a plan for purchasing troubled assets. In line with the U.S. stock market rebound, stock markets in Europe, Asia and Japan have also been recovering.

Following the rebound of the stock markets, the real economies have started to show some signs of positive effects brought about by the economic stimulus measures, although the pace has been slow.

For example, Japan, Germany, France and Italy, each of which has a major auto industry, introduced incentive schemes for the purchase of new cars and these schemes have produced some positive effects.

In Asia, the Chinese government introduced subsidy schemes to promote the purchase of cars and home electric appliances by rural residents and as a result, sales of cars and home electric appliances increased sharply.

The effects of the Chinese economic stimulus measures have contributed to an expansion of production by South Korean home appliance manufacturers, for example, increasing their exports to China. 

Japan introduced temporary cuts in the auto weight tax and the acquisition tax for cars with superior environmental performance and the Eco-Point scheme for environmentally friendly home electric appliances, including refrigerators and air conditioners.

As a result, orders for some eligible models, including hybrid cars, have increased sharply, raising hopes for an increase in consumption.

Asian Countries Acting As The Growth Engine Of The Global Economy

Amid the serious global recession, emerging economies, including China and India, which have maintained relatively strong growth despite the slowdown and Brazil, the Middle East and African countries, which are recovering more quickly from the impact of the global crisis, are attracting hopes as the future growth engine of the global economy.

According to estimates by the IMF, while the U.S. and European economies are likely to show much growth in the near future, the economic growth of the emerging economies is projected to accelerate in the coming years.

It is also apparent that economic stimulus measures dependent on governmental fiscal expenditures cannot be continued over the long term.

As the emerging economies in Asia and other regions achieve an expansion of domestic demand and sound development of their own asset markets, they, with their huge populations, have essentially become the new growth engine of the global economy.

To that end, it is important that they expand their middle-income class and effectively implement measures to enhance their competitiveness and resolve regional gaps, including building high-speed railways and advanced information highways, modernizing their financial systems and introducing advanced medical and educational services.

Positive effects brought about by these emerging economies as they continue to post strong growth amid the crisis are expected to spread to developed countries if companies from developed countries develop and introduce products and services targeted at the emerging economies’ middle-income class, which is expected to grow significantly in the future.

In order to secure future growth of emerging economies and spread positive effects brought about by their growth to countries and regions around the world, it is essential that these countries ease restrictions on investment and maintain and enhance the free trade system under the WTO.

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

Copyright Control © 2012 Oseme Group

Achieving Global Economic Stability

By M. Isi Eromosele

The world’s economies and financial systems are more interconnected today than ever before.

Given the importance of both inward and outward foreign direct investment for the global economy, world countries should warn against reactionary moves towards protectionism, both at home and abroad in response to recent periods of global economic instability and continue to work with international financial and trade organizations to promote responsible trade and investment practices.

The Importance of Global Economic Stability

All nations have a shared interest in the existence of a relatively open trade and investment environment supported by a regulatory framework in which all participants have confidence.

The recent financial crisis and subsequent downturn in global economic activity have exposed the need to review the current financial regulatory framework and adapt it to address the changed and unique needs of today’s global economy.

This review should include input from growing emerging markets, such as China, Brazil, India and Nigeria, among others.

As international investment has become increasingly important to the global economy, it is in every country’s interest to participate in the discussion and actively contribute to the development of measures to strengthen the global economy and maintain the effectiveness of its regulatory framework.

Ensuring stability requires a regulatory process that remains transparent and predictable. Furthermore, there should be a reciprocal responsibility on nations receiving international investments to ensure that investors who follow the rules are not discriminated against.

In order to contribute to the development of global solutions in this area, there should be close and continuing cooperation coordination between the G-20, the International Monetary Fund (IMF), the World Bank and other international financial institutions, governments and like-minded organizations to contribute to the stability of the global economy.

Global Economic Stability and Open Investment

The financial crisis that commenced in 2008 and the events that followed have shown that even advanced economies are not immune to economic instability. It has also demonstrated how events in one country or region can have a significant impact in others. As such, international cooperation is essential to the establishment and maintenance of economic and financial stability and several international institutions should work closely together to achieve this.

For example, the IMF should work with countries to implement sound and appropriate financial and investment strategies by:

• Reviewing member country’s economic and financial policies for compliance with domestic and external stability standards set by the IMF
• Providing counseling on fiscal, monetary and exchange rate policy best-practices
• Providing financial assistance, in the event that a member country experiences economic difficulties, so as to limit disruption to the domestic and global economies

An increase in global cooperation is vital for economic recovery and countries need to enhance collaboration across sectors, industries and disciplines.

Issues such as food and water security, employment and political dependability are closely linked with the economic stability of a country and should thus be addressed in tandem.

As such, the World Bank, in cooperation with the IMF should create an initiative that both assesses countries’ financial sectors and help formulate responses to each country’s particular risks and vulnerabilities.

One institution that could play a large role in aiding countries’ recovery is the International Finance Corporation by funding initiatives focused on easing unemployment, promoting open, competitive markets in developing countries and ensuring continued access to financing for banking sectors and businesses.

Promoting Global Prosperity And Domestic Growth

Diversification is the key to minimizing potential volatility in any country’s economic performance over time and therefore enhancing economic stability at home.

Diversification means not only broadening the number of economic sectors, but also enlarging the enterprise base, encouraging entrepreneurs and small businesses, and attracting increased international investment.

Country governments need to introduce a number of measures aimed at opening up their domestic economies and accelerating the pace of economic diversification while maintaining economic stability. These include:

• Boosting competitiveness through the development of infrastructure and improvements to the local business environment
• Creating an attractive investment climate for local and international investors
• Enhancing consumer protection by streamlining the provision of services
• Developing economic policies and legislation according to international best practices
• Identifying and actively promoting the specific industries in which the country believes it can establish itself as a leader at local, regional and global levels
• The imposition of no restrictions on profit transfer or repatriation of capital
• Maintaining an environment with no corporate or income taxes outside of a limited number of industries and very low, or non-existent import duties

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

Copyright Control © 2012 Oseme Group

Trade and Investment for Global Growth

By M. Isi Eromosele

As the global economy recovers from the worst crisis in many years, trade and investment are central to    regenerating strong, sustainable and balanced growth in the world.

The global economy is open for business, open for trade and open for investment. Just as importantly, the government of every country should be committed to doing everything possible to ensure that the world is open to business, open to trade and open to investment.

This is because the evidence is clear that open trade and investment, underpinned by an effective framework of rules, delivers the best results for both developed and developing countries. It is good economics.

The fastest growing emerging economies are now creating new opportunities for all to benefit further from trade and investment. Despite these benefits, there is an urgent need to restate the case for open markets because the insecurity that is a legacy of the economic crisis fosters a mood of protectionism.

So far, the world’s nations have largely resisted the temptation to put up trade and investment barriers. But nations must remain vigilant and reinforce the global system of rules that keep markets open for all.

It cannot be taken for granted that markets will remain open to world businesses, or that businesses will always be able to take full advantage of the opportunities that exist.

Governments can help. The role of Governments is to provide the conditions for private sector growth and investment, to use all the levers they have to break down barriers faced by industry both at home and abroad and to promote a strong and credible global trading system.

This is the trade and investment challenge. Every government should have a strategy to meet that challenge. They should set out an ambitious framework for building trade and investment based on the results of government consultations conducted with business, academics and NGOs.

Government Ministers and officials across government should aim to create the best possible environment in their respective countries for trade and inward investment and to deliver the practical support businesses need to trade and invest on a global basis.

Business people across the world should endeavor to seize the opportunities presented by trade and international investment to innovate and to build their businesses.

Internationally, governments must work more intensively with regional trade organizations and through bilateral relationships with countries all around the world to shape an international environment that supports open trade and investment.

Governments can collaborate to manage new global challenges such as climate change, food security, natural resource pressures and the impact of new technologies. Even as the world is becoming more multilateral with a growing number of more powerful players, bilateral relations between countries remain as important as ever.

As countries work to rebuild their own economies, they must redouble their efforts to enable developing countries to build their own paths to growth through trade and investment, and to help them develop the capacity to do so, especially in Africa. This is the right thing to do both on moral grounds and for the world’s interest.

The Case for Open Markets

Trade and investment will be crucial to achieving strong, sustainable and balanced growth. Open markets and globalization are key to global growth. But some countries remain marginalized.

The financial and economic crises that started in 2008 affected trade and investment hard. Global trade fell by 23 percent but has bounced back. Inward investment fell during the crisis and has still not recovered.

The human cost of the crisis fell disproportionately on the poorest countries who are also likely to bear the brunt of ongoing protectionism and the limited availability of trade finance.

The world is facing new challenges. Although there has not been a wholesale surge in traditional protectionism, governments have persisted with non-tariff based crisis measures that are protectionist in nature. Trade finance has been significantly affected.

Multilateral trade negotiations have become increasingly complex and harder to bring to a conclusion. Additionally, there are interactions between trade, investment and national security.

Opportunities for Trade and Investment Growth

The potential for global growth in trade and investment over the next decade and beyond is promisimg, if protectionist pressures can be avoided and other challenges addressed. Bilaterally and multilaterally, countries need to work to improve businesses’ access to global opportunities.

The approach should be wholesomely global and need to include markets where the economy is already strong, together with the fast-growing emerging markets that play an increasingly large role in global trade and investment.

But most new trade growth will come from the new emerging economies. The eight largest emerging markets now have a combined GDP roughly equal to that of the US. Europe will be a relatively slow growth region unless there is major further progress in reforming its financial system and deepening the Single Market.

UK-US trade relations are exceptionally close and deep. The UK is the largest foreign investor in the United States and the US is the UK’s top export destination after the rest of the EU.

But UK businesses face difficulties from the complexity of the US regulatory environment and from litigation risks. Big economic gains are possible from simplifying this and the EU-US Transatlantic Economic Council can help get things moving in that direction.

There is evidence that Commonwealth countries trade more with each other than would be expected from other factors, because of the legal, political, cultural and linguistic bonds which link them. There is much scope to develop this further.

Sub-Saharan Africa has strong growth prospects, but remains poorly integrated into the global economy. The region needs broader and deeper market integration, including infrastructure for power, transport and communications that will at the same time strengthen their ties with global markets.

Despite its consistent growth record, South Asia still has a high concentration of poverty. Intra-regional trade is low compared to their potential. Improved trade facilitation and logistics could cut the cost of trading by up to 70 percent within five years, helping create jobs, boost growth and improve the lives of poor people.

In the Caribbean, significant pockets of poverty remain and the region is vulnerable to shocks. The region needs a more resilient economic base. Support needs to be provided that would help to implement trade agreements, improve the environment for business and lower the costs and time needed to import and export.

Trade and investment are crucial to achieving stronger and more sustainable global growth. Countries need to do all they can to reduce barriers and improve access to global markets.

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

Copyright Control © 2012 Oseme Group