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Cazenove's Jeffrey: will 2013 be third time lucky?

by Richard Jeffrey on Dec 21, 2012 at 07:26

Cazenove's Jeffrey: will 2013 be third time lucky?

As world growth disappoints for the second consecutive year, will 2013 prove to be third-time lucky?

Current expectations remain relatively modest, for an improvement in world activity of just 2.5% in the coming year. A year ago, consensus forecasts were for an increase in world GDP in 2012 also of 2.5%, whereas the outturn looks like being around 2.2%. Lest you think I am about to say “I told you so”, I was at the more optimistic end of the range of expectations.

There was a relatively easy explanation for the undershoot in growth, versus earlier expectations, in 2011 – rising inflation and, behind that, an increase in commodity prices.

In nominal, or cash, terms, growth in 2011 was actually in line with what most economists had anticipated.

However, the demand destructive nature of rising prices became increasingly evident as the year progressed, depressing real growth. In contrast to this, we had expected a decline in world inflation during 2012 to make room for stronger growth. Evidently, this has not happened.

Weak domestic demand

The key to growth is domestic demand. While individual economies may show a growth stimulus from net exports (e.g. China and Germany), in a world sense, trade is a zero-sum game.

So why was it that domestic demand – made up of government spending, household spending, investment and inventories failed to kick in, despite lower inflation?

As ever, there is no single, common explanation for every economy.

For instance, it is evident that in the eurozone, the contribution to growth from households has been negative over the past year – unsurprisingly, perhaps. By way of contrast, household spending has been a strong contributor to growth in the US and better than many expected in the UK.

Nonetheless, there is one common theme evident in most countries: disappointing levels of fixed capital formation.

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