This year started off well with buoyant expectations about the global economic recovery, but as 2013 has progressed, positivity became somewhat subdued.
Schroder’s chief economist Keith Wade reported at the end of April that evidence was gradually building for a slowdown in global growth. He noted that 2013 appears to be following the same pattern of the past few years, where a strong start to the year fades into the spring and summer months.
The National Institute of Economic and Social Research (NIESR) noted in early May that global growth projections for 2013–14 are essentially unchanged from earlier this year, with a few notable exceptions, such as an upward revision for Japan. This has been offset, however, by some lower expectations from non-OECD countries. “With world output growth again projected at 3.3% in 2013 and 3.7% in 2014, the forecast again points to a global recovery that is hesitant, below par, and uneven.”
NIESR’s May report noted the global economy is now in its fifth year of working its way out of the largest financial crisis for several decades, but prospects for the medium term are unusually uncertain. “In many cases, progress with fiscal consolidation, private sector deleveraging, and the repair of financial sectors has far to go; all these factors form constraints on growth that may remain for several more years.”
**UK & Europe**
Spring figures showed the Eurozone still in recession, and many analysts went on to lower growth forecasts for 2014.
Schroder’s European economist Azad Zangana said: “Of the major countries reporting GDP figures, only Germany managed to eke out positive growth at 0.1%.” Zangana does not hold out much hope for emergence from recession for countries such as Spain, Italy and Portugal until at least 2015. He noted the release of May’s figures marked seven straight quarters of negative GDP for Italy, with its GDP falling 4.1% since its previous peak. Spain has now been in recession for six quarters. However, there are a few bright spots within Europe. Zangana believes the picture is a little brighter for Germany, Finland and Austria, and he expects France to exit its recession later this year.
Within the UK, the picture remains quiet. In March, PricewaterhouseCoopers reported the UK economy stands to benefit from rising consumer spending as the employment picture improves. However, households remain cautious on spending, as do businesses. “In our main scenario, we project UK GDP growth of around 1% in 2013 as a whole, rising to around 2% in 2014. This assumes a gradual revival in the global economy and no major accidents in the Eurozone.”
HM Treasury’s own monthly report in May compared 26 forecasts for UK GDP growth, which ranged from 0.2% to 1.5% for 2013. Next year appears to be generating slightly more optimism, as the range of forecasts goes from a low of 0.5% to a high of 2.4%. At the same time, expectations for CPI appear relatively close to the 2% target, at an average of 2.7% this year, falling to 2.4% next year.
**US**
Over the first half of 2013, it was the speed and strength of the US recovery that appeared to be leading the way for global growth. By spring, however, optimism about the US economy appeared to be waning.
Economists at Standard Life Investments noted quantitative easing, prolonged low policy rates, muted inflation pressures and safe-haven purchases continued to put pressure on US Treasuries. Fiscal concerns also remain a factor amid continued political uncertainty in the country.
Russ Koesterich, chief investment strategist at BlackRock, commented that with the Fed keeping interest rates so low for so long, expectations of rising inflation in the region continue to be rife. “For the past several years, however, inflation has remained contained, and our expectation is that the inflation environment is unlikely to change any time soon.”
Koesterich remarked in late May that the bottom line is that the US is still in the midst of a fragile recovery, and with long-term headwinds keeping prices down, inflation is unlikely to become a problem for at least another 12 to 18 months.
US unemployment figures continue to be a focus of attention. John Greenwood, chief economist at Invesco Perpetual, believes the US unemployment rate will only come down significantly when consumer balance sheets see greater repair. He said: “The labour market depends on the rate of spending, and the rate of spending depends on the health of people’s balance sheets. This whole process depends on getting those private sector balance sheets back in good shape, and getting US households back to a position where they are confident to spend. Companies will then do the same, and the unemployment rate will come down. It could take another couple of years, even from today, to go from 7.6% unemployment in the US to 6.5% or 6%.”
**China**
As the year has progressed, increasingly bad news emanating from China has led to growing concern over the repercussions of a slowdown in the region. In its weekly strategy report at the end of May, JP Morgan Asset Management’s global multi-asset team noted it was increasingly clear the Chinese growth upswing has stalled, in spite of the huge round of credit stimulus that has gone into the economy. “While we have long been sceptical of the durability of the Chinese recovery, this loss of momentum is certainly coming in faster than even we expected, but equally we would not panic just yet.”
Invesco’s Greenwood said: “We have seen before with Asian economies like Singapore and Korea that if these countries did not continuously reform and liberalise, then they hit a ceiling in growth, and they slowed down. China, to a degree, is hitting that kind of blockage, and they need to do further reforms. However, the impetus to do that is lacking at the moment.”
Managers noted investors are going to have to get used to the idea that the economy is not going to grow by 8% or more year after year.
**Continued Austerity?**
JP Morgan Asset Management’s global multi-asset team noted the worst of fiscal austerity is forecast to be behind us soon. “Over the three years between 2013 and 2016, the IMF now expects just another 1.1 percentage points (pps) of GDP tightening in the US, after a total of 3.9pps between 2010 and 2013 (and 1.8pps in 2013 alone). And in the eurozone, austerity essentially finishes by the end of this year, with just another 0.2pp of GDP tightening expected by 2016 – a massive change from the 3.5pps of tightening over the previous three years.
“The contrast is even starker in the eurozone periphery, where Spain and Italy are expected to switch from severe fiscal tightening to a slight loosening over the next few years.
“However, this has the downside that, on these forecasts at least, the Spanish budget is not brought under control, with the cyclically adjusted deficit steadily worsening over the forecast horizon to reach 5.7% in 2018. It looks like this problem has essentially been ‘parked’ for now, but it could come back to haunt policymakers.”
Patrik Schöwitz of the JP Morgan team noted the big outliers in the thrust of fiscal policy are Japan and the UK. “For the UK, the assumed tightening path looks pretty heroic, suggesting the risk of slippage is high. For Japan, aggressive tightening is only forecast to start in 2014.”
“It seems that advanced economies are very nearly over the hump of austerity. This clearly does not mean happiness and sunshine all round. Debt levels may be peaking, but they remain very high, leaving economies vulnerable to external shocks or growth disappointment. Further out, fiscal challenges remain across many countries, with the Japanese fiscal outlook still unclear and entitlement reform in the US necessary to prevent a renewed worsening of the fiscal situation, to name but two.
“Nevertheless, the drag on global growth from fiscal policy looks set to diminish from here, which may even pave the way for a few upside surprises.”
**Bonds v Equities**
Although the first half of 2013 saw the shine fade from bonds in favour of higher-risk assets, investor demand has continued for select sovereign debt issues, particularly emerging market bonds. However, yield compression in developed markets has also been seen among EMD issues, albeit to a lesser degree.
At the time of the BRICs summit meeting in South Africa in March, Thanos Papasavvas, strategist in Investec Asset Management’s fixed income and currency team, noted EMD still features a number of positives. Emerging markets have been fortunate to benefit from higher savings rates and falling credit and inflation risks. “We expect emerging market debt to generate positive returns for the year; however, for those worried about rising yields, we favour local currency over hard currency EM debt in terms of outperformance.”
Outside of sovereign debt, bond managers TwentyFour Asset Management point out the attractions of the high-yield corporate bond sector, but even here yields are falling. Mark Holman, managing partner at the group, said: “With intervention in global markets at unprecedented levels and interest rates firmly anchored at record lows, it is no surprise huge volumes of money are chasing bond yields lower.”
Meanwhile, equity managers continue to favour their own asset class, believing that even without the income stream of dividends, higher-risk assets look better value in current conditions. Simon Callow, manager of the CF Miton Diversified Growth Fund, said: “While the macroeconomic environment is poor and corporate earnings growth broadly weak, ultra-loose monetary policy is ultimately proving a powerful tool supportive of risk assets.”
