2012 is ending on a more positive note.
The Euro area authorities have been aggressive in bolstering the numerous rescue facilities over the past year, while European banks have reduced their cross border exposures, which we argue makes the eurozone less vulnerable to shocks.
Meanwhile the US recovery is gaining ground, most visibly in the housing market, and there are signs that the Chinese economy is building momentum again.
Yet many challenges remain. At the time of writing, the US authorities were still squabbling over how to avoid the fiscal cliff.
Also despite progress, the eurozone is still vulnerable. For example, Greece’s sustainability within the single currency remains questionable, although with an election in September the German government may pull out various stops to help Greece over 2013.
Moreover there are no signs yet of sustained growth in Continental Europe. Nor is a lasting recovery evident in the UK, even though we judge that talk of a triple dip recession is misplaced.
We enter 2013 with hopes that the worst of the dangers of the past couple of years may be behind us, but with relatively little conviction that that the effects of the crisis are over.
To provide a solid foundation for growth next year, US lawmakers need to find a solution to the ‘fiscal cliff’ before year end. We view it more likely than not that an agreement will be reached, albeit not necessarily perfectly 'balanced'. Overall we see 2013 as the year when the housing and jobs recoveries gain some better momentum. The housing recovery finally broke into a slow jog in 2012 helped by ‘Operation Twist’ pushing down longer term mortgage refinancing rates; we expect this to be sustained in 2013 as QE3 is augmented, to replace ‘Twist’ rolling-off. For the US jobs market, we expect to see some ‘catch-up’ in recovery stakes after its relatively weak performance since the crisis started. We expect the steady macro recovery to continue with 2013 GDP growth forecast at 2.1%.
Recent economic releases have disappointed such that a decline in Q4 GDP is looking more likely with a ‘triple dip recession’ a possibility. But this is not our central view. We continue to question whether construction is shrinking at an annual pace of 13%, as official statistics claim, and in any case a moderation in the published pace of decline would tend to help the GDP numbers. Our GDP forecasts are -0.1% for 2012 and +1.5% for 2013, the latter gaining some support from the Funding for Lending Scheme. We have tweaked our view of currencies to reflect a more gradual depreciation in the euro. Our new profile envisages the pound trading close to $1.60 until mid-2013 before slipping down to the mid-$1.50s. Sterling should regain the firmer side of the 80p level against the single currency over the next six months.
Q3 GDP data showed the Euro area economy back in recession and poor Q4 figures so far imply a further contraction in the final quarter. While Italian PM Mario Monti’s intended resignation has grabbed centre stage recently, the German elections next September are arguably more significant, since their approach has resulted in the government taking a more conciliatory line towards Greece. A ‘Grexit’ next year now looks unlikely, though it is quite possible that markets catch-up with that particular can further down the road in 2014. Accordingly we now envisage that the euro will depreciate more gradually towards $1.20 by end 2013, instead of $1.18 over the next six months as we believed previously. After Mario Draghi’s recent post ECB meeting press conference we are even more convinced that the central bank will bring the refi rate down again early next year, although we judge (and hope) that the Governing Council will not lower the deposit rate into negative territory.
After yet another turbulent year we and most commentators are forecasting a marginally better 2013 for the global economy. Indeed, the IMF’s October forecast put growth at 3.6% compared to its 3.3% 2012 forecast. A firming in Chinese GDP next year should help drive firmer global growth, whilst other jurisdictions including the Euro area remain weak. Whilst there remain plenty of lingering downside risks, we can take some reassurance from the narrowing in current account imbalances since the start of the 2008/9 downturn. We also take some reassurance from the drop in cross border exposures, which could imply a more modest degree of contagion from any Euro crisis strains.