In the second quarter of the year contrasting aspects will continue to dominate the global economic scenario. Investors will wait for key economic trends to clear up to make firm decisions on the markets, which have so far been characterized by volatility. Currency swings will therefore continue to reflect underlying concerns. Traders will be looking for yield, especially in the sector private bond, or by opting for actions with high dividends and clear bullish prospects and funds real estate that ensure stable flows. It is the verdict of john greenwood, chief economist of invesco ltd.
The continuation of the financial crisis in the Eurozone will continue to be the problem most felt by operators, and possible tensions on the Petroleum constitute the second critical aspect. The constant slowdown of the Chinese economy and the sluggish American recovery close a picture in which the timid signs of a US awakening are not sufficient to counterbalance the uncertainty that dominates the markets.
In United States the labor market is showing a trend recovery, but consumer confidence, which settled at 69,2 in the last measurement, is still well below the "normal" threshold of 94. Manufacturing and non-manufacturing activities reacted positively, summarized by ISM indices of 53,4 and 57,3 respectively, bearing witness to a "healthy" and self-sufficient, albeit slow, recovery.
Still subdued i property prices: Despite steady declines and the introduction of federal anti-foreclosure programs, demand is failing to recover. The budget provides for a report for 2013 deficit/GDP of 5,5%, suggesting a possible revival of the tensions that erupted last summer, due to the raising of the debt ceiling. As regards the monetary policy of the Federal Reserve, no forthcoming quantitative easing programs are in sight. Greenwood expects the current uptrend to continue but remain modest: real GDP growth of 2,1% and CPI inflation down to 1,4%.
The United States, unlike the Eurozone, contain public spending to levels accepted by the markets up to now (40% of GDP), because they can count on a currency-reserve of value of undisputed prestige. Sooner or later, however, the financial markets will begin to "demand a more rigorous approach". It is a photograph of the European situation.
In the eurozone le OTHER concocted by the ECB have played an important role in extinguishing - in the short term - tensions on sovereign debt, but the European-style "Quantitative Easing", measured in net terms (502 billion euros), is a panacea of very limited duration. In the banking sector, capital consolidation is still lagging behind on the global roadmap, but here too the long-term refinancing of the Central Bank has promoted sovereign bond purchases by lenders, also driven by the recommendations of theEBA on capital requirements. Main event of the region was lo swap of the Greek titles, which allowed for a reduction in the debt stock of 105 billion, with devaluation of the securities, in terms of market value, of 70%.
According to Greenwood, the financial markets will continue to worry about Greece's risk and the elevated "possibility that further swap operations may be necessary to further reduce the outstanding debt". From a future point of view, "the ability of banks to comply with the Core Tier 1 capital requirement of 9% envisaged by the EBA by the end of June" will be fundamental. In this sense, the collection should rise to 115 billion euros, figure still very far from being reached. On the credit crunch front, the shift of bank portfolios from loans to the private sector to the public sector leads to a – still persistent – blockage of credit to the real economy. This defensive position of institutions will be maintained throughout 2012, amplifying the eurozone recession: negative growth is expected for the monetary union of 0,3%, with CPI inflation at 2,1%.
In UKcontinues Greenwood, “Since the erosion of personal income due to a surprisingly strong inflation rate was the main reason for the poor performance of the UK economy in 2011, inflation performance will be a crucial element in the recovery of economic growth in the next two years. CPI inflation has already fallen from 5,2% in September to 3,4% in February and I expect a further decline – except in the event of a conflict with Iran – to 2% by the end of the year (the 2,3 % at the annual level). Recession in the Eurozone combined with moderate growth in the US will limit GDP growth to 0,6% in 2012.”
In China, despite Premier Wen Jiabao's statements of a slowdown to 7,5% in 2012 – justified by the desire to cool domestic demand – Greenwood expects real GDP growth of8,2%, with CPI inflation of 3%, still below the 4% set by the Central Bank.
Il Japan is still dealing with the aftermath of the tsunami, in the context of stagnation of growth that has its origins in the past. The closure of nuclear power plants and the consequent increased need for energy imports have halved the current account surplus. Real GDP contracted by 0,6% in the fourth quarter of 2011, resulting in a decrease in monthly household spending of 2,3 percentage points year on year in January. The weakening of the yen, associated with the rise in oil and electricity bills will further erode the purchasing power of households, shifting the balance needle from deflation to mild inflation, equal to 0,2%. GDP, according to Greenwood, will grow by 2,1%.
In Asiaconsensus forecasts for inflation and real GDP for March see real GDP and CPI inflation at 4,0% and 3,3%, respectively.
With regard to raw material, notes Greenwood, “Commodity prices strengthened in line with equity prices from October through February, but subsequently saw a sell-off. Agricultural and food prices have remained essentially stable since September, while industrial raw materials only recovered in January. The price oil futures remained fairly stable, while only the price increased spot, which reflects fears of impending shortages rather than any risk of long-term supply shortages. With a couple of exceptions (such as Iran and Syria), nearly all areas of the world are producing more oil and natural gas today than ever before, so concerns about the short-term price trend and its impact on the inflation may justifiably be considered excessive.”
