What’s Happening To The Global Growth Story?

17 Jul

The International Monetary Fund states the global economic recovery is still at risk, and Eurozone economies remain in a “precarious” situation.

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With the backdrop of the financial crisis, issues around the world including China, US and especially the Eurozone – the figures are relatively good, as at least they’re positive. Yes, compared with forecasts in April 2012 the figures are worse but is that due to a decline or the previous figures being overly optimistic. Personally, I believe the latter to be the case but that doesn’t mean all is well – rather the results are within the expected range – not bad news, not great but rather feared and anticipated.

A major concern as current is  a delayed or insufficient response from European leaders to the crisis would further derail the recovery. This looks unlikely when one reviews the decisions and actions so far – but nothing is impossible.

The IMF has downgraded its forecast for global growth for 2013 to 3.9% (from the 4.1%).

One of the biggest downward revisions was to the UK, now expected to grow by 1.4% in 2013. In April it predicted 2%. The forecast for growth in 2012 was also reduced for the UK, down to 0.2% from the 0.8% cited in April. These are now more in-line with my personal expectations – in my speak I would say these figures now look realistic rather than the previous forecasts were significantly more optimistic.

The IMF’s prediction for world output this year – as measured by gross domestic product – was little changed at 3.5%.

In its updated World Economic Outlook, which is published twice each year, the Washington-based lender said: “Downside risks continue to loom large, importantly reflecting risks of delayed or insufficient policy action.”

 
The Eurozone

The fear over Europe and the Eurozone is the sovereign debt crisis and the need for its’ leaders to :-

  • take further action to avoid an escalation in the debt problem 
  • prevent a market meltdown
  • there must be the utmost priority to resolve the crisis in the euro area

 

The 17-member Eurozone economy is expected to contract by 0.3% this year before rebounding by 0.7% next year.

The IMF, the European Central Bank (ECB) and the European Union, has demanded austerity measures in the struggling economies of Greece, Spain and Portugal in return for bailouts.

The crisis has led millions of people to lose their jobs and benefits. There were also concerns that runs on bank deposits would trigger a Eurozone-wide bank run and banking crisis.

Recently, Eurozone leaders agreed to bail out Spanish banks directly and unveiled a plan to implement a fiscal and banking unification. But the proposals for such a decision will not become concrete until later this year, and it is not yet known how long it will take for such a union to take shape.

The ECB last week cut its benchmark lending rate below 1% to 0.75%. In addition, the IMF has called on the ECB to use less orthodox monetary tools – possibly providing the region’s banks with additional unlimited loans, or long-term refinancing operations (LTROs) – but there are risks associated with such actions.

 

United States

The IMF also urged US lawmakers to solve their “fiscal cliff”. This refers to a set of fiscal deadlines at the end of the year, including deciding whether to extend tax cuts for the wealthiest Americans.

If policymakers fail to reach consensus on extending some temporary tax cuts and reversing deep automatic spending cuts, the US structural fiscal deficit could decline significantly – IMF suggests possibly 4% of GDP in 2013. Whatever the actual figure, the risk is if this is resolved, US growth could stall next year, with significant spillover into the rest of the world.

 

Emerging Markets

Growth in emerging economies was also revised downwards. The IMF has forecast growth slow down to 5.6% in 2012 before picking up to 5.9% in 2013.

Growth momentum dropped particularly in Brazil, China and India, considered to be the drivers of a global recovery.

That was aggravated by risk aversion among investors who pulled out their money out of these economies, causing domestic share prices to drop.

 

My Outlook

I believe we are on track for weak growth but at least there is growth. With the back-drop of the economic and fiscal world we now find – I don’t believe we could expect for more.

As for the markets – the concern being are we trading in a range? Or will there be actual headline growth?

I am defensive in my general outlook and feel that to manage portfolios with the plan of positive returns. My chosen overall strategy is to focus on diversity, strong dividend and income growth, global and niche exposure, take advantage of opportunities as and when they exist and be realistic.

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