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The Global Economy

Monthly letter from Swedbanks Economic Research Department by Cecilia Hermansson No. 7 October 25, 2012

Risk of deeper and lengthier global slowdown

Uncertainty surrounding the crisis in the eurozone and economic policy in the US following the presidential election are the main obstacles to global growth. The majority of forecasters expect a gradual, modest recovery in the next year. The risks are heavily on the downside, however, and to meet the forecasts a number of important political decisions will have to be made to strengthen confidence. In the US, forecasters are now being more realistic. Despite rays of hope, the recovery will be slow. The presidential election will be decided by the economy. The more positive the data, the better the chances for President Obama. Germanys economy is slowing. Even industrial production cant stop the slide. After stagnation this year, a slight uptick is expected in 2013 given that the crisis in the eurozone seems to be under control. Germany is contributing a bigger share to overall demand in the eurozone as its imports grow slightly faster than exports.

Global growth risks on the downside

Forecasts for the global economy have again been revised lower in the last month. There is still more optimism in the stock market than among macroeconomic forecasters. Thats probably because the liquidity injections by central banks have improved the mood in the market, but that will change when the effects begin to ebb and more negative macro data are announced. Despite dismal conditions, forecasters generally see a recovery in the next year. Not robust, but a slow improvement nonetheless in developed countries and in emerging markets. There is clearly great uncertainty, with the risks on the downside. We could easily see a couple of quarters of shrinking activity after the third quarter this year before things turn around. A number of factors that suggest a continued slowdown: 1) The purchasing managers index, whose levels suggest further production cutbacks for a while to come (in spite of a slight increase last month in the US and Germany at the same time that France continued to fall), 2) Representatives of the real economy, who are mentioning a downturn like we saw in 2008-2009 (but without the same liquidity problems), 3) Rising unemployment and weaker barometers, which hurt confidence.

Until there is some decision about US fiscal policy, uncertainty will lay itself like a wet blanket over hiring, investment and consumption. While the Democrats are now suggesting they might accept an extension to the temporary income tax cut, which has already been extended for a year, it has been rejected by the Republicans and could complicate negotiations. In Europe, things are likely to get worse before they get better, even in major economies such as Germany and France. Japan is headed toward a new recession with the help of weak global growth and its conflicts with China.
Global purchasing managers index

Economic Research Department, Swedbank AB (publ), SE-105 34 Stockholm, tel +46-8-5859 7740 E-mail: Internet: Responsible publisher: Cecilia Hermansson, +46-85859 7720, Magnus Alvesson, +46-8-5859 3341, Jrgen Kennemar, +46-8-5859 7730, ISSN 1103-4897

The Global Economy Monthly newsletter from Swedbanks Economic Research Department, continued No. 7 October 25, 2012

At the same time there are factors that suggest an improvement or at least a less pronounced decline: 1) liquidity from central banks, 2) lower US gas prices and other bright spots in the US economy, and 3) a better outlook for emerging markets thanks to stimulus packages. There are positive signs for industrial production in China, which rose by 9.2 percent in September while retail sales climbed 14.2 percent, an improvement compared with the previous month and a sign that consumption is now contributing more to growth than investment. GDP grew by 7.4 percent in the third quarter. Although this is a further decline from 7.6 percent in the second quarter, the data nevertheless show that there isnt a major risk of a hard landing as things stand. Monetary policy in more developed countries shouldnt be very effective at this point and mainly affects the economy by improving sentiment in the stock market, which wont necessarily last long. An important reason, however, why nearly all forecasters are predicting a cautious recovery next year, including us, is the assumption that the uncertainty surrounding the crisis in the eurozone and US fiscal policy will subside and that this will strengthen confidence and the willingness to spend.

Indicators in US housing market

USA more realistic expectations

After the financial crisis broke out and during the global recession many US economists kept predicting GDP growth of 3 percent or more per year. After several quarters of overly optimistic projections, forecasters have now revised their estimates down to 2 percent. Unemployment is expected to remain high at just under 8 percent, at the same time that monetary policy will be more expansive for several years to come. This is the outlook presented by the National Association for Business Economics (NABE) in its October survey. The main bright spot is energy investment, which is raising the investment rate. Housing investment is also starting to help the economy, but from very low levels. Signs in the housing market are becoming more positive. For example, sales of paint have risen, which points to a true increase in the construction sector. The election campaign is winding down. Republican voters (55 percent) are more negative about the economy than Democrats (40 percent). Party affiliation is probably an important factor in how Americans see the economy. In reality the reverse is true, i.e., Democratic voters have been hurt more than Republican voters in recent years.

The fact is that the middle class that has suffered the most, while low income voters have received government assistance and higher income voters have benefited from rising stock prices. Median household income in real disposable terms fell by about 7 percent in 2007-2010, at the same time that median net worth fell by about 40 percent. Whether unemployment will fall closer to the magic number of 7.5 percent is unclear. President Obama probably needs positive numbers for the third quarter, which will be published on Friday (tomorrow), to improve his chances of winning the election.
US household incomes, number of poor

Germany how is the economy doing?

Efforts to introduce a banking union in the eurozone are continuing, including a single supervisory mechanism (SSM) for the regions 6 000 banks. German Chancellor Angela Merkel has said she is positive to the banking union, but doesn't expect one to be in place by next January or that it will encompass every bank from the start. Though it wont resolve Spains acute crisis, the proposed

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The Global Economy Monthly newsletter from Swedbanks Economic Research Department, continued No. 7 October 25, 2012

banking union could create the impression of a stronger institutional framework in the eurozone, which is needed to guarantee its future. The crisis in Spain has to continue to be managed properly and the government has to decide to seek assistance, which may be easier now that the election results in Galicia worked out in Prime Minister Rajoys favor. On the other hand, slightly better macro data and lower bond yields in the wake of the ECBs commitment to buy Spanish bonds give the government more breathing room to try to avoid seeking help from the program. The health of the German economy is critical to the eurozone. Confidence among German companies and households is now sagging, at the same time that retail sales and new car registrations have slowed. Data on new order bookings show that even German industry can't fend off the decline in surrounding markets. New orders from the eurozone fell by 14 percent in the first eight months of the year compared with the same period in 2011. The downturn in German industry is mainly due to lower investment in machinery and equipment and a declining outlook for exporters. The auto industry in particular is being affected by lower demand in Europe, but also in China and the US. In real terms industrial production does not appear to be growing at all in 2012 (compared with 8.7 percent 2011 and 12 percent in 2010). Assuming that the crisis in the eurozone eases next year, production could gradually recover and German producers could benefit from slightly better growth prospects for emerging markets. The construction sector, especially housing investment, is giving the economy a boost. As a safe haven, Germany benefits from low interest rates, which is providing support for the housing sector. On the other hand, infrastructure investment in roads, etc. will decline as earlier stimulus packages are phased out. Over all, a good finish to
Swedbank Economic Research Department
SE-105 34 Stockholm, Sweden Phone +46-8-5859 7740 Legally responsible publisher Cecilia Hermansson, +46-88-5859 7720. Magnus Alvesson, +46-8-5859 3341 Jrgen Kennemar, +46-8-5859 7730

2012 in the real estate market could create a carryover effect that leads to a decent burst in housing investment next year.
Germany: Economic indicators
40 30 20 10

Retail trade (excl. cars) New orders, manufacturing

0 -10 -20 -30 -40 07 08 09 10 11 12

Source: Reuters EcoWin

New orders, construction

New car registration

The German economy is facing a period of modest rebalancing from a eurozone perspective. Imports are expected to grow slightly faster than exports and the current account surplus will fall from just over 6 percent of GDP in 2012 to about 5 percent in 2013. That might not seem like much, but the fact that prices and wages could increase slightly faster in Germany than in many other euro countries will nevertheless provide some help for exporters in the crisis countries. The key, however, is that they have products buyers want. It's not just a question of price; quality means just as much, especially for German importers. Balancing growth and competitiveness in the eurozone won't happen overnight, but at least it seems things are moving in the right direction. Cecilia Hermansson

Swedbanks monthly The Global Economy newsletter is published as a service to our customers. We believe that we have used reliable sources and methods in the preparation of the analyses reported in this publication. However, we cannot guarantee the accuracy or completeness of the report and cannot be held responsible for any error or omission in the underlying material or its use. Readers are encouraged to base any (investment) decisions on other material as well. Neither Swedbank nor its employees may be held responsible for losses or damages, direct or indirect, owing to any errors or omissions in Swedbanks monthly The Global Economy newsletter.

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