Author: Stefan Schneider (+49) 69 910-31790
September 30, 2013
Whereas the first fruits of "Abenomics" are becoming more evident in Japan, the Fed and the ECB have been proceeding extremely cautiously. Defying expectations, the Fed did not begin to taper its bond buying programme in September, justifying its decision with worries about financial conditions and potential collateral damage from the complex US negotiations on the budget and the debt ceiling. ECB President Draghi emphasised at that institution's recent press conference that he remained "very, very cautious about the recovery" in the euro area.
Since hopes of a sustainable economic recovery in the industrial countries have been dashed in the past two years, the Fed's and the ECB's "insurance policy" is no doubt understandable. However, we believe that this time the economic situation is different than in 2011 or even in 2012. For one thing, the US housing market really appears to be recovering, even though the yield spike triggered by the talk about tapering has tempered the momentum. Our US colleagues are bullish also with regard to the labour market and figure that an acceleration of non-farm payrolls will bolster personal spending and the economy as a whole.
For another thing, the eurozone finally appears to be shaking off the longest recession of its still short history. While the 0.3% expansion of GDP in Q2 was mainly due to the Big Two, Germany and France, the rates of contraction in the countries on the southern periphery of Europe have also eased noticeably. The increase in the Purchasing Managers' Index in nearly all of the EMU member states points to further – albeit still relatively modest – growth in the second half.
The capital outflows from the emerging markets induced by the tapering debate have refocused the markets' attention on the structural shortcomings that in some countries remain substantial. However, the noticeable cyclical cooling in the past few quarters is primarily a consequence of the poor demand from the industrial countries. Taken together, the result was a stagnation of world trade in the summer months. But now the situation is not only brightening in the industrial countries. In China, too, the economy appears to be taking off again, which should also provide some tailwind for the other emerging markets. All in all, odds are that the global economy will pick up momentum more noticeably in the next few quarters, and in 2014 the pace of global growth could hit 3 ¾%, outstripping this year's forecast performance by roughly 1 percentage point.
Now, if nothing else the experience of the past five years suggests that caution should be exercised concerning forecasts. If this were a normal economic cycle, the scale of the prior downswing, the extremely expansionary monetary policy and the sea change in the global inventory cycle could probably make a person quite certain that the self-reinforcing dynamics typical of an upswing would be likely to unfold. However, the economic growth cycle continues to be overshadowed by a powerful financial cycle that admittedly had already turned down in 2008 but whose downswing phase is probably going to persist for several more years. A recently published OECD report comes to the conclusion that the scale of private-sector and financial-sector deleveraging in the eurozone, in particular, is still very modest in many countries. This means that the still to be completed adjustment processes will continue to weigh on the economy. Event risks are looming in the political sphere in particular. At present, these are the already-mentioned disputes over the US debt ceiling and budget. In the eurozone, uncertainty could be caused – at least temporarily – by the ECB audit of bank balance sheets and the banking industry stress test at the beginning of next year as well as the ongoing Banking Union negotiations alongside the political imponderables in some of the peripheral countries.
However, we consider as rather minor the cyclical risks from the rise in long-term interest rates, which will probably continue with the expected start of Fed tapering towards year-end. The Fed has just shown us that it will only begin tapering when it is convinced that the US upswing is robust enough to withstand the anticipated increase in yields at the long end. For this reason, the start of tapering will be a quasi-official stamp of credibility certifying the strength of the US upswing and thus could even bolster the confidence of private-sector players – not only in the US.
For further information see World Outlook Sept. 2013: Global prospects remain upbeat
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