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The big call: Goldman Sachs answers five key economic questions
by James Poulter on Jan 21, 2013 at 13:24
Will global growth struggle, the eurozone crisis be resolved, and emerging market growth start accelerating? The investment bank looks at the big issues facing markets at the start of a new year.
Goldman Sachs' economics research team are asking some big global macro questions for 2013, predicting yet another year of global growth below trend, although slightly more encouraging than 2012 if the economic environment improves.
We shouldn't be expecting the eurozone crisis to be resolved any time soon and Goldman's team believe policymakers will fail to commit the resources required to fully resolve the problems - so more muddling through despite a number of anticipated improvements.
Emerging markets could provide a boost for global growth and inflation might be 'well-behaved' in 2013. Click through to see Goldman's big macro calls for the year ahead.
Q. Will global economic growth spend another year below trend?
A. Yes; although it should feel better, as growth momentum picks up through the year.
'Our global growth forecast of 3.3% year on year (yoy) growth in 2013 follows a likely out turn of about 3.1%yoy in 2012, and 3.8% in 2011. This is below the average of the past 10 years of 3.6%. It is also below our estimate of potential growth of 4.2% based on a production function approach. So, prima facie, it does look as if we are headed for another year of sub-par growth at the global level, with growth in the US still averaging only around 2% for the year, the Euro area again stuck on the wrong side of zero, and growth in Japan falling back from its reconstruction-aided bounce in 2012.
However, our 2013 economic outlook differs in several encouraging ways from 2012, so that even if the annual average growth rates look similar for the two years, the economic environment should feel better. The main reason for this relates to the time profile of growth.
While this time profile is clearly sensitive to how the dust settles in the ongoing fiscal cliff/debt ceiling negotiations in the US, under our baseline assumptions we expect lower growth at the start of the year, when we expect the fiscal impulse in the US (and the Euro area) to be the most negative.
But we expect a gradual acceleration as the year progresses and as the boost from the private-sector spending (including capex) increases and the fiscal drag diminishes.
Q. Will monetary policy in 2013 simply be more of the same?
A. No. While we expect policy to remain broadly accommodative, some important shiftsmay already be in train.
With most major central bank policy rates at or close to the zero bound, and forward guidance on policy all but ruling out rate hikes in the near future, it may be easy to believe that monetary policy will simply be more of the same in 2013 – low rates for an extended period. In reality, however, the challenges of the zero-bound (in the US, UK and Japan) and financial fragmentation (in the Euro area) have forced central bankers to be creative and pushed them into the realms of ‘unconventional’ unconventional policy, and we can expect to see more such forays in 2013.
To begin with, there are likely to be several important personnel shifts in major central banks that may have policy implications. Beyond a shift in personnel and the monetary policy ramifications from that, the most interesting developments may occur through the explicit interaction of fiscal and monetary policy – the first glimpse of which we are already seeing in Japan. Having swiftly put together a ¥10trn stimulus package, there is every indication that the Abe government would like to see the BoJ ensure that there is no increase in government bond yields in response to the increased JGB issuance to fund the stimulus.
The events calendar should keep Japanese policy in the spotlight for most of the first half of the year, at least until the Upper House elections in July. Beyond that, if US growth does accelerate into the second half of the year, in line with our forecasts, focus will shift to the response of Fed policy, and whether there is any reduction in the extent of monetary accommodation. Our US economics team expects QE3 to run through 2013 and – at a reduced pace – through 2014 as well.
Q. Will the Euro area crisis be resolved in 2013?
A. No. We expect another year of ‘muddling through’. But a better institutional set-up should imply less international transmission or more ‘containment’ of Euro area shocks.
Containment strategies will continue to be in vogue in the Euro area in 2013. In other words, we continue to expect measures aimed at avoiding any spread or intensification of the existing problems, but at the same time we do not think that European authorities will be willing to commit the resources required to resolve them fully. On the one hand, this reflects the magnitude of the stock and flow problems affecting peripheral economies in the Euro area – the large public-sector debt overhangs in Greece and Italy and the government deficits in places such as Spain and Ireland will need to be addressed within a credible institutional framework that involves some degree of mutualisation of risks. On the other hand, the difficult decisions required by any such eventual resolution are unlikely to be taken before elections in Italy and Germany are concluded over the course of this year.
Without a decisive resolution it will be hard to fully restore private-sector confidence and credit availability, and stimulate growth in the Euro area. As a result, 2013 promises to be another year of weakness for Europe’s economy. We expect another significant contraction in Spain in 2013 where public-sector restraint is likely to be among the most severe, a small contraction in Italy, and next to no growth in France for 2013.
Q. Will growth accelerate in EMs?
A. Yes, back to trend in many places. Markets may worry about tightening pressures well before we see hikes (on our forecasts, not until 2014).
The fact that most EM economies are entering 2013 with growth at or below potential after two years of slower sequential growth means that there is ‘room’ for an acceleration back to trend. We forecasts that EM growth will pick up from 5.5% in 2012 to 6.1% in 2013. In keeping with the notion of reacceleration back to trend, we expect growth in China to pick up to just a little above 8% in 2013 from 7.7% in 2012 (and to a little above that in the years beyond). We also expect decent accelerations in India and Brazil, which, along with China, saw some of the most significant disappointments in 2012.
Q. Will Inflation become a real concern in 2013?
A. No. Inflation measures should stay ‘well-behaved’ in 2013 but some inflation markets may start to become restless.
We expect inflationary pressures to remain subdued in major developed markets throughout 2013. This is primarily based on our view that output gaps in major markets such as the US, UK, Japan and Euro area are still large, and is one of the reasons why we expect continued accommodative monetary policy in these countries. Towards the end of 2013 and beyond we also expect an easing of inflationary pressure from commodity and energy prices, as the global energy supply constraint gradually loosens on account of the shale oil revolution in the US. We expect core inflation in the US to remain around 1.5%, less than the Fed’s 2% target.
In the Euro area we forecast a modest fall in core and headline inflation at an area-wide level, with a small degree of divergence opening up between higher inflation in the core economies and lower inflation in the periphery. In the UK, we expect slightly larger falls in both core and headline inflation. In Japan, we expect both core and headline inflation to increase only slightly above zero in 2013.
Upside surprises in long-term inflation expectations could materialise in places such as Germany where financial conditions are exceptionally loose, although a modest degree of higher inflation in the core economies is part of the necessary rebalancing process within the Euro area.
But the most notable exception may be Japan. It is difficult to reach reliable conclusions given the illiquidity in inflation swap markets, but it does appear that inflation swap prices have increased tangibly, especially since the autumn, when political pressure on the BoJ to generate inflation began to intensify. Of course, a tolerance for somewhat higher inflation (and inflation expectations) may be part of a strategy for escaping the liquidity trap not just in Japan, but in the US and UK too.
But the moves here are an example of the fact that bond markets can start to price the prospect of inflation well ahead of any inflationary pressure actually materialising.