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

Copyright Control © 2013 Oseme Group

Changes In The Structure Of The Global Economy

By M. Isi Eromosele

There is a variety of emerging economies and they abound in diverse attractiveness as markets. A comparative review of emerging markets based on various indices shows that, at this moment, countries in the Middle East are ranking high in GDP per capita on the basis of purchasing power, and countries such as China, Mexico and Russia are ranking high as exporting partners.

In particular, the value of China’s imports rank third in the world, following the U.S. and Germany, and exceeding that of Japan.

Resource-Rich Countries Rich In Funds

From among emerging economies, Russia, China, Mexico, the United Arab Emirates, etc. are rich in natural resources such as crude oil and natural gases and rank high in production of primary energy.

Emerging economies that possess natural resources have increased their foreign reserves, reflecting the soaring resource prices which continued until last summer.

In addition, with regard to SWFs (sovereign wealth funds) that are established for purposes such as investment of surplus funds yielded from resource exports and the aim of accumulating fund reserves for the future, the equity holding ratio therein per country or region shows the prominent presence of top-ranked crude oil and natural gas producing countries, such as countries in the Middle East.

Global Trade Restructuring

Viewing from the medium- to long-term standpoint, the world’s resource demand will continue to rise. World Energy White Paper published by IEA envisions a scenario in which the crude oil price will rise to a level not less than $122/bbl on a substantial basis, or $206/bbl on a nominal basis by 2030.

Moreover, the price of natural gas is connected to the crude oil price and is on an upward trend, which would be a positive factor for the economies of resource-rich emerging economies.

The most attractive country or region for business expansion from a medium-term perspective (approximately three years), is China, while India rank second and Vietnam rank third. From among the developed countries, the U.S. came in seventh, but it is obvious that many multi-national companies, in general find emerging economies as targets which are more attractive than developed countries.

Such results suggest that ties between multi-nationals and emerging economies will continue to strengthen.

Looking at the respective import status of India and Brazil, which are in the midst of sharp economic growth, India increased the value of its imports from around the world by 4.1 times in the past five years and Brazil increased such imports by 3.6 times.

Meanwhile, it is China which has come to show its prominent presence in these emerging markets. The value of India’s imports from China is now 8.6 times as much it was in 2003, and the value of Brazil’s imports from China is now 9.3 times as much as it was in 2003.

This may be due to the facts that many multi-national corporations utilize China as their production and exporting hub, and in addition to this, that exports from Chinese companies are thriving. In addition to China, resource-rich emerging economies also have come to show their strong presence in markets

The Global Trade Influence Of ASEAN Countries

From among emerging economies, Asian countries such as China and ASEAN countries have accelerated the division of labor process, and established a production network within the region, based on which they have been actively carrying out intraregional intermediate products trading and exporting final products worldwide to regions including Europe and the U.S., and thereby they have affirmed their position as the “world’s factory.”

Asian countries, which have achieved economic growth through the processing trade but now face the economic recession in Europe and the Unites States, have begun to shift their visions to growth through expansion of their domestic market.

Changes In Production And Trade Structures In Asia

Since the beginning of 2000, Asian countries, including China and ASEAN countries, have accelerated expansion in their triangular trade by utilizing a production network, wherein they import intermediate products from within the region, and process such products into final products to be exported to other regions, including Europe and the U.S.

Looking at the transition in the international trade of parts and consumer goods between Asia and the U.S. and between Asia and EU for the purpose of verification of this expansion, one can see that the value of intra-Asian exports of parts tripled in the past decade and that a production network has been developing within Asia.

On the other hand, with regard to consumer goods, intra-Asian trade has been increased by only 1.5 times. However, exports of consumer goods to the European Union and the United States showed an increase larger than that, which indicates that production network in Asia has come to be heavily dependent on exports of consumer goods to Europe and the U.S.

The composition of exports by Asian countries also shows change in the structure of production and trade in Asia. The proportion of exports to China has grown in Japan, ASEAN countries and South Korea and these countries have expanded their functions as supplier of intermediate goods, including parts, to Asia and China.

As for China, it is not only the proportion of exports to the EU that has increased; the exports to all other regions are also gaining weight, which shows China’s expansion in function as a supplier of final goods worldwide in addition to Europe and the U.S.

Global Transitional Change

In Asia, the trade of intermediate products has expanded and final products processed in the region are primarily exported from China to Europe and the U.S. However, imports by Europe and the U.S. have been sharply reduced since the global financial crisis began in 2008.

Asian countries have actively committed to luring foreign capital to improve their industrial clusters as production and exporting hubs, but the global financial and economic crisis has given rise to the necessity to set a new strategy for targeting wide-range emerging markets, including Asia and other regions, in addition to the markets of developed countries such as Japan, the U.S. and Europe.

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 Heartbeat 2012

By M. Isi Eromosele

Economic indicators show that global growth remains sluggish in 2012, which has led to some volatility in financial markets. Between the seemingly never-ending European sovereign debt crisis, the slowdown in Chinese economic activity and some weaker-than-expected U.S. economic data, markets have been on edge recently. However, global economic activity continues to expand, albeit at much slower pace than expected. 

In the United States, real GDP growth downshifted from an annualized rate of 3.0 percent in the fourth quarter to 2.2 percent in the first three months of 2012. Recent indicators suggest that the expansion has continued in the second quarter as both the manufacturing and services PMI remained above the all-important 50 level in April.

The Chinese economy entered the year on a softer note as the 8.1 percent growth rate that was registered in the first quarter was the slowest year-over-year rate since the depths of the global recession in mid-2009. However, the rate of Chinese economic growth may be starting to stabilize.

Economic conditions in the rest of Asia have been mixed recently, although they are generally consistent with positive, albeit slow, economic growth. It appears that Japan registered a solid rate of real GDP growth on a sequential basis in the first quarter, although growth in other Asian economies that are tied more closely with China was lackluster. For example, the year-over-year growth  rate  in  Taiwan  was  only  0.4  percent in the first quarter, and real GDP in Singapore was up only 1.6 percent.

Economic conditions in the Eurozone have weakened even further. The manufacturing PMI declined from 47.7 in March to 45.9 in April, a three-year low, while the services PMI dropped from 47.9 in March to 46.9 in April. The Eurozone labor market also deteriorated further in March to  post  an  unemployment rate of 10.9 percent after a 10.8 percent reading in February, underscoring the still weakening labor environment in the region. The only bright spot in the Eurozone was a 0.3 percent print for retail sales in March. 

The Latin America region seems to be one of the least affected regions in the world by the recession in the Eurozone and the slowdown in the Chinese economy, at least so far. This does not mean that some of these economies have not suffered from the world economic environment; they have.

This has been especially the case for the Brazilian economy, with important ties to Europe on the manufacturing production side as well as with China on the commodity production side. The Brazilian manufacturing PMI dropped to contraction levels in April by printing 49.3 compared to a reading of 51.1 in the previous month. Industrial production for March was also weak, dropping by 0.5 percent on a seasonally adjusted basis and by 2.1 percent compared to the same month a year earlier. 

However, other Latin American countries have seen their economies improve during the first quarter of the year. Countries such as México, Chile, Perú and Colombia have seen improvements in growth during the first quarter of the year even though there are strong headwinds that could prevent this growth from continuing into the second quarter due to weak economic growth in other parts of the world.

It seems that once again this year, emerging market economies will outpace developed economies even though that growth may be lower than what these developing economies have been reporting during the past several years.

The World Economic Pulse

• The global economy, which has been in recovery for more than two years, entered 2012 on a soft note. Although the U.S. economy continued to expand in Q1, the United Kingdom slipped back into recession and the Eurozone probably entered a renewed slump as well. However, it appears that growth in many Asian economies, which slowed over the course of last year, may be stabilizing.

• The good news is that inflation appears to have crested, at least for now, in most countries. Therefore, Central Banks with policy flexibility have scope to ease monetary policy. For example, the Brazilian Central Bank has cut its main policy rate by 350 bps since August and loan growth in China appears to have stabilized after slowing throughout 2011. The bad news, however, is that many Central Banks, especially those in developed economies, have very little ability to ease policy further

• The global GDP growth will slow to about 3 percent in 2012, below the long-run average of 3.6 percent. Although global growth likely will be slow, we do not expect a renewed global recession

• Although our base-case scenario looks for continued global expansion, there are plenty of downside risks to keep in mind. A re-intensification of the European sovereign debt crisis could, in a worst case but plausible scenario, lead to a global credit crunch.

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

Financial Imbalances In The Global Economy

By M. Isi Eromosele

The rebound in the global economy continues to be hampered by financial imbalances within the global economy. These difficulties, which include rising non-performing loans in Japan, have been present for many years. Others surfaced when global equity markets were severely affected by the still ongoing financial crisis.

As such, financial institutions in the United States and Europe have become much more cautious in extending business loans in the wake of major defaults. For many of these financial institutions, debt service problems have become more severe because of low nominal growth in global GDP as well as the prevalence of high spreads.

Financial stimulus actions taken by governments in developed nations have mitigated the fall of the global economy from worse effects of the financial crisis. The U.S. current account deficit is approaching an unprecedented level for this stage of the global business cycle. Financing the deficit has become less streamlined, given the substantial weakening of the dollar during the past year.

In this difficult environment, the global rebound is lacking in sectoral and geographical balance. Global growth is currently anemic for the second year of what should have been a full-throated synchronized soaring world economic resurgence. In many parts of the world, a recovery in fixed investment is virtually non-existent.

There is an increasing risk in the current global economic environment that macroeconomic policies may be running up against their limits of effectiveness, when they would be less stimulative, rather than being expansive.

Despite the above assessment, the fundamentals of the world economy should emerge in fairly sound condition as the global financial markets stabilize. This would support global growth at rates nearing longer-term trends akin to the early 2000s.

World growth potential has increased due to intensifying interconnected world trade and global financial integration, greater investment in human capital, wider availability of productivity enhancing technology and stronger institutional capacity all over the world.

Inflation has gradually been reduced in the high income countries, even as the economies of emerging nations are rapidly expanding. Double digit inflation has become an exception and a number of countries are experiencing deflationary conditions.

Strict and increasingly independent policies, fiscal restraint and labor-market reforms were key actions that helped to reduce inflation. On balance, this has been a beneficial development, as it has helped engender a more stable macroeconomic environment while increasing the flexibility of relative prices and real wages.

The trend towards deflation poses new challenges. Chief among these challenges is that debt dynamics can easily become destabilized in a deflationary environment. With this scenario as a backdrop, global Central Banks need to focus on avoiding the lower boundaries rather than the upper limits of the forward looking inflation targets when setting monetary policies.

Uneven Recovery In Developed Countries

The global recovery among the developed nations has been much uneven at best. In the United States, this recovery weakened in mid-2010. Quarterly real GDP in the major economies slowed considerably.

Central to this weakness is that the rebound in the growth of business investment from the slump of 2008-2009 has come more slowly than expected. The debt-financed excessive capital spending of the boom years had left many companies across the industrial world with a need to scale back on spending for capital equipment.

During this process, economies in the developed nations were essentially sustained by a sizable infusion of stimulus funds from governments. This, in turn provided certain stimuli to specific industries of demand, especially consumer spending.

However, at this time, the level of stimulus provided by microeconomic policies has passed its peak and the reliance on continued U.S. consumer spending has fizzled, further contributing to global financial imbalances. This has accelerated a tremendous growth in U.S. household debt growth and the widening of the U.S. trade deficit.

Expectations about the pace of global economic recovery in developed nations are now dependent on the extent to which the corporate sector can make necessary adjustments to fit the new world financial order.

The pace of GDP growth is expected to remain slow in the United States and Japan through the second quarter of 2012, while the Eurozone will continue to experience little change in its current sluggish growth.

Growth will accelerate going into the second half of 2012 and into 2013 as more progress is made in repairing corporate balance sheets and global monetary conditions are restored.

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

Copyright Control © 2011 Oseme Group

Global Economic Recovery 2011

By M. Isi Eromosele

The slow recovery from the global downturn will make this year a complex one for the world economy. The first part of the year was demanding as the world continued a slow recovery from the global recession. Progress has been uneven. In the United States, the economy will continue its slow recovery while the employment picture has worsened. A substantial inventory correction will continue, unsettling the labor market, workers income will continue to fall, resulting in additional decline in household spending. This in turn will hamper the growth in real domestic spending in many developed market economies.

The timing of a full global recovery will depend on two major connected issues:

• Stabilizing the global financial system
• Restoring confidence in the global economy

The global recession has caused a dramatic shift in spending worldwide. Companies have been putting off investment projects and instead accumulating cash reserves. Consumers have been adding to their savings while postponing major purchases. Banks basically stopped lending and instead bulked up their cash reserves. The above trends have combined to hamper a smooth path to global recovery in 2011.

It is imperative that the developed market economies continue to take influential actions that will reinstate confidence in the international economy. These financial and economic schemes must be substantial, consistent and convincing. Their framework should have the goal of establishing prolonged economic growth.

The necessary stabilization of the international financial system is an absolute requirement for global economic revival. To achieve this goal, three events need to take place:

• The liquidity of the global financial system must be maintained
• Financially draining assets must be dealt with
• Global financial regulations, standards and codes must be revised

The assertive efforts of Central Banks in developed market economies to provide liquidity to the global financial system has been mostly successful. Interbank lending rates have trended downwards since the last quarter of 2010. However, while corporate bond issuance has improved, behavior within the market are still below expectation. The issuance of large scale public debt may hamper the availability of private finance. It is imperative that Central Banks take decisive actions to enhance the flow of global credit. Conversely, governments should be cautious when contemplating supplementary borrowing.

There has been an extraordinary reversal in inter-country capital flows. The positive net flows of private credit to emerging markets turned negative in 2010. In order to maintain liquidity with the global financial system, this trend needs to be alleviated. This would require additional actions from the International Monetary Fund (IMF).

Another issue that has to be addressed is the continuing fall in the provision of trade finance, especially to emerging economies. The result is a precipitous drop in global trade. This situation can be reversed with the provision of extra export credit and trade insurance.

The United States and other developed market economies had embarked on a continuing effort to deal with the issues of toxic assets and the recapitalization of major financial institutions. Their actions have been crucial in stabilizing the global financial system. A critical trend that should continue is that key global financial institutions must not be allowed to fail.

In revising global financial regulations, standards and codes, a new international finance architecture needs to be put in place. This new architecture would have to incorporate the following components: improved transparency, more focused supervision in enforcing the revised regulations and expanding participation of emerging economies during the formulation of these regulations.

Corrective actions taken to hasten the revival of the global downturn need to be decisive, brave and forward looking. A profound and synchronized set of actions would need to be implemented by the developed global economies to move the international economy towards a full revival.

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

Copyright Control © 2011 Oseme Group

Rebuilding The Global Economy

By M. Isi Eromosele

The global economy has been through difficult times during the past eighteen months. The economies of the major developed countries have all been in recession. The market confidence in the global economy plummeted to its lowest level since the Great Depression, accelerated by a sharp drop in global trade, output in manufacturing, creation of financial wealth and tremendous loss of jobs. As such, the fundamental basis of the international financial system has been brought under intense scrutiny.

During this most recent recession, the economic activities in the world economies declined sharply. This decline exposed the close linkages that exist within the world economy. What started as a mild recession within the United States economy quickly spread to the other world economies, developing into a global recession. This had a major impact on world trade. The prices of major commodities were profoundly affected by the steep drop in industrial demand.

Despite the above assessment, the underlying foundation of the world economy is still strong. Furthermore, leaders of the developed market economies market economies have collectively implemented a multi-faceted reply to the now slowly recovering recession. To sustain demand, monetary policies were eased. Unparalleled actions have been taken by the major global economies to back the international financial sector, helping to maintain the continued flow of capital financing and credit.

Longer-term financial restructuring plans are being formulated to produce a more secure, durable and effective global financial system. It is expected that when these plans are fully implemented, they will restore a better sustained growth in the global economy.

This global downturn should not be taken as just another of those recurring financial shocks. It represents a momentous opportunity to make some important changes to the interrelationship between the global financial systems and the world economy. The following policy corrections would need to be implemented:

• The untenable large account imbalances that had been maintained in the main developed market economies need to be rectified. The required rebalancing in deficit countries, such as the United States, Britain and Japan toward countries with surpluses, such as China will not happen overnight. It would need a concerted effort to execute this over some time. Because of the huge amount of money involved, it would reduce the speed of recovery in the global economy.
• The design and implementation of the global financial system needs to be completely reevaluated. With the system that had been in place for the past two decades, the ability of financial institutions to facilitate the provision of business and personal credit was greatly expanded. As a result, the level of debt relative to GDP in many developed countries rose sharply. The credit sector of global financial services needs to be more closely supervised under new and enhanced regulations.
• The future potential growth of the global economy will be lower than previously expected. This is the aftermath result of past misguided investments in poorly researched real estate and the production of cars that did not meet the specific demands of customers. The global economy needs to be readjusted to encourage sustainable growth in the future.

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

Copyright Control © 2011 Oseme Group