One year ago, the euro area dominated market participants’ thoughts. As the economy buckled under the weight of fiscal austerity and banking sector stress, and several countries struggled to maintain bond market access, investors fretted about the euro’s future and the havoc its disintegration might wreak. Fast-forward a year and the euro area remains deeply troubled, particularly at the periphery where deep recession and major political uncertainty persists. But with the ECB currently a credible buyer of last resort in sovereign bond markets, leaders having made new efforts to keep Greece within the euro area and modest steps having been taken to establish a banking union, the euro crisis is in abeyance. Risks remain, not least those associated with political developments, such as Italy’s general election in February and pressures emanating from Spain’s regions. But thanks to the breathing space afforded by the ECB’s actions, conditions may well be in place for a modest economic recovery to take hold in the euro area before the year is out.
As we outline in our latest quarterly global economic outlook, it is events on the other side of the Atlantic that are dominating investors’ thoughts at the start of 2013. While the immediate risk posed by the fiscal cliff has been avoided, the new Congress needs to come up with agreement on both the debt ceiling (which the US government has already hit) and automatic spending reductions now due to come into force in March. We remain relatively sanguine that a deal will ultimately be reached to both raise the debt ceiling and avoid much of the near-term spending cuts. Nevertheless, a fiscal tightening is now baked in. That will dampen US activity in the first half of 2013 to an annualised rate of only 1½%, before growth returns to its underlying pace, about 2¼% from the second half. Failure to reach an agreement, of course, would deliver a massive blow to both investor sentiment and economic growth.
The growth outlook in the other major economies remains poor. We expect euro area GDP to contract by 0.2% this year and to grow by little more than 1% in 2014. Similarly, we expect the UK recovery to remain hindered by continued post-crisis adjustment and austerity, resulting in growth of less than 1% in 2013 and little more in 2014. Having contracted through the second half of 2012, Japan’s economy looks set to benefit from a significant near-term fiscal stimulus, which will complement ongoing monetary easing. A return to positive growth therefore looks on the cards in 2013. We expect choppy growth in Japan of x% in 2013 and, despite a hike in the consumption tax next year, y% in 2014.
We are most optimistic about the outlook for emerging Asia, where China’s recovery continues to gain momentum. With de-stocking at an end and recent stimulus feeding through, we expect growth to continue to accelerate through the first half of the year and to reach almost 8½% over 2013 as a whole. In Korea, however, we have revised down our growth forecasts again to reflect both weaker global growth as well as a rising won. But we are a little more optimistic about growth in India, where a more favourable inflation outlook justifies an upgrade in our FY13/14 growth forecast to 6.0%. In emerging Europe growth will remain patchy, constrained by euro area weakness, as well as some countries’ own imbalances. In Latin America, however, prospects look fairer, with growth in Brazil responding to recent policy easing.
For the major central banks, 2013 will be another year of highly accommodative policy. On our central view, the ECB and BoE will leave policy unchanged, leaving the BoJ alone in unveiling further easing. The Fed will continue to make large-scale asset purchases, but may look to trim their volume in the second half of the year. Until growth resumes the ECB will continue to mull another rate cut. And, like the BoJ, new leadership at the BoE could also trigger policy innovation. For the PBOC, with growth and inflation to rise, we see little chance of further easing, but we see rate cuts in India and Korea. Abundant global liquidity will provide a challenge for many major emerging market central banks, such as in Turkey and Brazil, which will again resort to a range of tools to reduce upward pressure on exchange rates and credit growth, while also seeking to support growth. In emerging Europe, rate cuts in Russia this year look less likely than in Hungary and Poland. And in Mexico, where growth remains solid, interest rates will be unchanged for the fourth successive year.
*%, Y/Y. **%, Q/Q annualised for the US. ***Indian full-year figures provided for fiscal not calendar year. Source: Bloomberg and Daiwa Capital Markets
*Core CPI (excl fresh food). **WPI. Source: Various and Daiwa Capital Markets
*Main policy rate or asset purchases target as specified. **Assets purchased under asset purchase programme introduced in October 2010.
***Turkish interbank overnight rate. Source: National Central Banks and Daiwa Capital Markets
*Year-end. Source: Bloomberg and Daiwa Capital Markets
Daiwa Capital Markets’ regional economic teams