03/01/2013
Why 2013 Will See Faster, Stronger Global Growth
Thursday, 03 January 2013 | 00:00
Barring major geopolitical shocks,the world economy in 2013 should mark the beginning of sustainably faster growth with declining trade imbalances.
Expansionary monetary policies will continue to drive the cyclical upturn in the United States and in the euro area, despite significant headwinds from fiscal consolidation.
East Asia will remain the fastest growing segment - and the largest surplus unit - of the world economy. Unfortunately,a good part of that growth will be on the back of its trading partners. East Asia sells $270 billion more than it buys from the rest of the world. Its huge excess savings will continue to be a source of finance to deficit countries.
Economic activity in Latin America will strengthen. With an estimated current account deficit of nearly $80 billion, this area is making a net contribution to world economic growth.
Fed's Easy Money to Partly Offset Fiscal Tightening
Exacerbated by unusually strong political tensions, America's fiscal emergencies have overshadowed problems of relatively slow growth and high unemployment. Based on the economy's third quarter numbers, the U.S. public debt currently stands at 103.5 percent of gross domestic product (GDP), nearly double what it was during the most recent low of 54.4 percent in 2001. This year the public debt is expected to exceed 110 percent of GDP.
How can this worrying debt dynamic be stopped and reversed? The answer is: the U.S. would have to begin running a substantial surplus on its primary budget balances (that is budget before interest charges on public debt).
Here is an example of what happened the last time the U.S. set its public debt on a steep declining trend. The primary budget was balanced in 1994. Surpluses followed, culminating at 3.1 percent of GDP in the year 2000. Over that six-year period, the gross public debt declined from 71.1 percent to 54.5 percent of GDP.
Can that feat be repeated? Certainly,but the U.S. would now be starting with a primary budget deficit of about 5 percent of GDP, and the growth of public debt would only begin to stabilize and slow down once the primary budget reaches surpluses of 1-3 percent of GDP.
Given current political contingencies, it would not be very meaningful to speculate on how â and if âthat will be done. But it is clear that something must be done to generate sustained revenue increases and government spending cuts. Obviously, properly calibrated measures of discretionary fiscal tightening would be betterâ and less damaging â than automatic tax hikes and reductions of public outlays.
The Fed's present and announced future policy stance is geared toward offsetting some of the depressive impact of higher taxes and lower public spending through direct support to interest-sensitive components of aggregate demand â household consumption,residential investments and business capital outlays, a total of 83 percent of the U.S. economy.
All these sectors are already responding to low credit costs. In the first three quarters of this year,residential investments have been growing at an annual rate of 11 percent. Over the same period, business investments and private consumption were increasing 9 percent and 1.8 percent, respectively.
This substantial forward momentum will be sustained by easy credit conditions, and I believe that a growth rate of the U.S. economy between 2.5 percent and 3 percent in 2013 is highly probable. Since that pace of advance is in the range of the economy's noninflationary growth potential, further gains in employment creation are certain to follow.
Euro Zone Will Exit Recession in the Second Half of the Year
The euro area is a complex system of 17 nation states sharing the same currency. Its evolving institutional infrastructure is being strengthened by crisis management mechanisms, strict budget agreements and the banking union. Markets are reacting positively to these developments; they have also taken a more favorable view of significant fiscal consolidations achieved by heavily indebted euro area countries.
The progress there is remarkable:the euro area's cyclically-adjusted budget deficit was nearly halved in 2012 to 1.7 percent of GDP, and is expected to be roughly balanced by the end of this year. Still, the gross public debt, currently estimated at slightly above 100 percent of GDP, is a far cry from the targeted 60 percent.
It is possible, however, that the debt growth will stabilize and begin to reverse in the next year or two if, as presently expected, this year's primary budget surplus were to double to more than 2 percent of GDP. Further surpluses are likely to follow as a result of budget rules mandating total deficits between 0 percent and 3 percent of GDP.
Economic growth has been a major casualty of the fiscal crisis and efforts to restore market confidence with credible deficit cutting measures. The current recession will begin to ease up sometime next summer, but the recovery will be too slow to spur employment growth.
Easy credit conditions have yet to soften the blow of a manifestly excessive fiscal tightening. Loans taken up by the euro area's private sector in October were falling at an annual rate of 1.2 percent, but the growth of bank loans to governments accelerated to 9 percent. Clearly, the monetary policy is facing an uphill battle to spur domestic demand in an area where some 80 percent of household and business financing depends on bank loans.
But the external demand is helping. The euro area's trade surplus appears to have tripled last year to an estimated $170 billion. These sharply improving trade balances are expected to completely offset last year's decline in domestic demand. External trade is making a strong contribution to depressed economies in Portugal,Spain, Italy and France.
Predictably, most of this trade improvement is due to collapsing imports. It is still too early to talk about increased competitiveness because structural reforms in several euro area countries are just beginning to take hold.
East Asia Should Rely More on Domestic Demand
With so much to do to build and upgrade infrastructure and social welfare systems, countries in this region should export less of their excess savings and devote more resources to these two key pillars of steady and sustainable growth. That would be good for them and for the rest of the world.
Of the three largest economies in the area, only China maintains a significant growth momentum. Beijing seeks to stabilize the economy in the 7-8 percent growth range, mainly because that is thought to be compatible with long-term price stability. It also intends to gradually reduce the role of exports, and to generate most of the economic growth from household consumption and business investments.
Japan is trying to ride out the recession on the back of exports and its old-style pump priming. That is unfortunate because the country needs policies to address problems (declining family formation, low birthrates and new challenges presented by a rapidly aging population) that are holding back its large domestic spending aggregates (consumption and housing). Pushing the Bank of Japan to flood the economy with liquidity and to debase the currency is not going to help any of the problems affecting its structurally impaired private consumption and residential investments (more than 60 percent of GDP). And neither are the public works - the proverbial "bridges and highways to nowhere."
India is unlikely to come out quickly from its current slowdown. With an inflation rate of more than 7 percent, the central bank is correctly resisting demands for interest rate cuts. Real short-term interest rates of about 1 percent indicate that credit conditions are still easier than they should be. Obstacles to faster growth are elsewhere. Most of them are on the supply side, caused by transportation and energy bottlenecks. The resulting supply-demand imbalances are sustaining rising price pressures even at declining capacity utilization rates. Since there will be no immediate relief to acute infrastructure problems, and the ensuing supply shortcomings, the economy will remain this year in a slowing growth pattern.
Latin America's Recovery Driven by Domestic Demand
A sharp drop of Latin American exports was the main cause of its last year's growth slowdown to an estimated 3.1 percent. Slightly better growth prospects look likely this year as a result of large infrastructure investments and an expected improvement in farm output.
With the exception of Argentina,most major economies of this area have some room for policies to support growth, because they don't face crippling constraints from excessive external deficits, widening budget gaps or accelerating inflation.
Brazil's economy is poised for a rebound on the wave of large infrastructure investments, recovering commodity exports and efforts to reduce production costs.
Mexico will also get most of its economic growth from domestic demand. Strengthening recoveries in the U.S. and Canada could provide additional impetus to growth in the second half of this year.
Argentina is expected to have stronger economic growth this year owing to an anticipated increase in farm output. Beyond that, the country's growth outlook is difficult to assess. The reliability of Argentina's inflation and national accounts data is currently a matter of serious dispute with the IMF.
Investment Choices
A broad cyclical upturn underpinned by expansionary monetary policies favors equities and commodities. Bonds have had a good run, but that is largely over. Even though actual inflationary pressures in world's major bond markets will remain contained in the months ahead, improving growth prospects will rev up inflation expectations and drive prices down. Spain and Italy are probably the only two markets where bond yields are likely to decline from their current levels.
Assuming no military confrontations in the Middle East, Central Asia, the Korean Peninsula and Southeast Asia, gold does not look like an attractive asset to hold.
Source: CNBC
