In terms of “Economic Commotions”, 2012 has been as important as 2008. In 2008, the breakdown of global capitalist system was triggered by the collapse of Lehman Brothers. Whereas in 2012, we have seen various creative actions from policymakers working hard “not” to fix but to delay economies from collapsing!
Are policymakers living in a “fantasy land” where the world economy will fix itself through the operations of the business cycle, and the “magic of the market” coming to the rescue? We are now into the fifth year of the financial crisis, and we have not – and are well away from – seeing a fix to the crisis! We are currently in an era where the financial system is being sustained only because of interventions by the world’s major central banks through an activity called “quantitative easing” – which simply means creating more money!
Policymakers fail to see that this method no longer creates conditions for recovery or increase in business activity, and they are simply financing accumulation of profits through speculation, in other words creating a bubble – the very same thing that led to the 2008 crash.
If pumping liquidity into the financial markets helps, why aren’t we seeing a recovery in unemployment numbers?
After a contraction of 0.5% in 2012, the euro area is expected to grow by at most only 0.3% in 2013 and 1.4% in 2014. In 2012 the US grew between 2 and 2.2%, however this is expected to fall to 1.7% in 2013. These figures are well below the levels experienced during every other “recovery” in the post-World War II period. Japan, whic
h had experienced a contraction last quarter, is expected to grow by only 0.6% in 2013, after growing by 1.5% in 2012. These are figures provided by the UN, and although the figures may vary a little, reports from all other major international financial institutions highlight the same trend.
These weak numbers were due to contracting world trades. In 2009, the world trade fell by 10%, but then rebounded significantly in 2010. However in 2011, the growth of exports started to slow and then decelerated sharply in 2012, mainly due to declining import demand in Europe and anaemic aggregate demand in the United States followed by Japan.
Most economists believed that the BRIC economies could provide a new base for the expansion of global capitalism, however falling growth rates in these economies has proved otherwise. Last year, the growth rate in China dropped from 10.4% to 7.7%. Brazil, where growth reached 7.5% in 2010, recorded a rate of just 1.3% last year, while India’s growth has fallen from 8.9 to 5.5%.
In our point of view, the global businesses are being cynical towards the future due to previous financial crises and this is not allowing headway towards a recovery. This mindset has to change…further stimulus will only delay a recovery causing the bubble to expand.
Between 2007 and 2011, private investment in the 27-member European Union fell by more than €350 billion, larger than any previous decline in absolute terms. This represented more than 20 times the fall in private consumption and four times the decline in real gross domestic product. Private investment is now 15% lower than in 2007, meaning companies will not generate some €543 billion in revenues between 2009 and 2020 that they otherwise would have.
A recent report from McKinsey Global Institute noted that European companies had excess cash holdings of €750 billion for which they could not find profitable outlets. The piling up of cash points to a breakdown in the basic dynamic of capitalist production, in which investment leads to the accumulation of profit, which then results in further investment and economic expansion.
The US economy is suffering from the same mindset, where companies are piling up cash while profits are being accumulated through investor sentiments and speculation in financial markets rather than the technicality of the companies themselves i.e. the companies’ capability of generating more profits by increasing products and services.
In 2012, we have seen many measures from policymakers to spur growth, however none of these have brought a sign that we are in a recovery phase. The current mindset has to change; private investment will need to increase to lead the economy towards a recovery. The worst mistake it could make is to believe that half-measures will suffice or that the capitalist economy will eventually right itself. Though growth in the Emerging Markets continued to remain positive through their domestic demands, they will eventually suffer a hard landing due to diminishing demands from developed markets.
Regional Outlook
UNITED STATES
The US economy will stay on a moderate growth path next year amid lacklustre consumer spending and weak business investment.
The US Federal Reserve has broadcast its intentions to continue increasing the overall size of its balance sheet in an attempt to stimulate the sluggish economy. The US federal funds rate, its main policy rate tool, remains at the exceptionally low level of zero to 0.25% and there are no expectations that it will shift in 2013. The Fed is on hold as far as the eye can see. We certainly don’t see the rates rising this year.
In early February we are ought to see another fiscal fiasco on the US debt ceiling. Should the Congress not take action to raise the country’s borrowing limit, the US will default on its debt. We believe the Republicans will not be willing to take the blame of forcing the US into defaulting it debts.
EUROPE
A Greek exit and deterioration in Spain are the currency union’s biggest short-term risks. Besides Greece, the focus will be on Spain – specifically, if or when it applies for a bailout package that would make it eligible for the Outright Monetary Transactions (OMT) introduced by the ECB. Further easing is expected, given recession in the euro area. The ECB has followed a Taylor rule over the last decade, taking into account not only inflation but also the business cycle status. Therefore, it is expected that the ECB’s monetary policy will be accommodative in the near future.
We’ve seen four consecutive quarters of negative GDP growth. We might see a 25-basis-point rate cut that could come in the first quarter of 2013, which would bring down the official policy rate to 0.50% from its current 0.75% level. But, additional monetary accommodation could be seen as well.
The ECB stands ready to step in with further assistance if market conditions warrant. The ECB has broadcast its willingness to buy government bonds on the open market through its so-called OMT program. Most analysts agree that a rate cut to 0.5% would mark the low point for the ECB in the current monetary policy easing cycle and then rates would be on hold for the remainder of 2013.
EMERGING MARKETS
In this interconnected world, what happens in the key economies of the US, Eurozone, and Japan this year will almost certainly impact the global economy at large, but the ebb and flow of action and reaction is shifting. Emerging markets, for instance, are generally lessening their trade dependence on the US and Europe, and there are other countries that can drive global growth—some of which may even surprise us in 2013. In addition, a likely continuation of easy monetary policies in the developed markets this year could result in more investment dollars into global equity markets including emerging and frontier markets.
Emerging markets in general have had three characteristics in their favour: generally high economic growth rates, large amounts of foreign reserves and low foreign debt. Many emerging economies appear to be on the cusp of consumer booms as well as productivity advances, which should bode well for future growth potential.
The middle class is growing in many emerging markets, and with it, the potential to fuel a consumer spending boom; the numbers in developing and Southeast Asia look particularly compelling to us. The latest estimates from the International Monetary Fund project developed economies as a whole to have achieved GDP growth of only 1.3% in 2012, with growth expected at 1.5% in 2013. In contrast, emerging Asia is expected to post an estimated GDP growth of 6.1% in 2012 and 6.8% in 2013.
CHINA
Following a year tainted by heightened economic uncertainty, the world’s second largest economy is setting itself up for a positive 2013. Supported by the slew of upbeat economic data and improving investor sentiment, the benchmark Shanghai Composite rallied almost 15% last month, pushing the market into positive territory for 2012.
Worries over possible overheating in the economy led Chinese policymakers to exercise caution with unleashing new stimulus to support growth in 2012. In September, Beijing approved over $150 billion in infrastructure spending – around one quarter of the total size of the stimulus package unveiled in 2008 to prop up the economy following the onset of the global financial crisis. Nonetheless, China’s economy has staged a recovery helped by a pickup in domestic demand, and is expected to grow in the 7.5%-8.5% range in 2013.
INDIA
After going through a gloomy phase in 2012, the Indian economy is poised to return to a healthy growth trajectory in the early part of 2013-14 on the back of some positive factors. While it may not be a smooth ride due to several risk factors going ahead, investors and economists say the worst may be over for the Indian economy.
Inflation, which has emerged as a major policy challenge for almost the past three years, is also expected to moderate in the months ahead and there is a consensus that it may settle in the 6-7% range by end-March 2013.
Perhaps the most crucial factor that should help jumpstart growth and boost investments as well as sentiment would be the easing of interest rates. The Reserve Bank of India has signaled its intent to support growth and expectations are that the central bank may cut policy rates in January.
I hope that you enjoyed reading
Warm regards
CEO
Kuala Lumpur : Malaysia
Stuart Yeomans 