Emerging economies must learn to grow while relying less on mature markets, according to Dexia Asset Management’s economic and financial outlook.
“Except in the United States, economic activity has weakened everywhere since the end of 2011 and even contracted in the euro zone late this year. However, this global slowdown is due only partly to the worsening in the European crisis. More fundamentally, it reflects the difficulty in securing a new growth regime,” DAM in it economic and financial outlook said.
“Mature economies’ must return to growth, while their domestic demand will be constrained for another couple of years by both private- and public-sector deleveraging. Emerging economies must learn to grow while relying less on mature markets. This necessary switch in growth engines will most likely be a slow process. In 2013, economic activity should accelerate moderately in emerging economies and provide only modest support to mature economies. Against this backdrop, central banks’ policies in mature economies will remain accommodative and, if necessary, they will not hesitate to put through new quantitative easing plans, especially as – in the current environment – inflating their balance sheets has no inflationary impact,” it added.
US GDP has continued to expand at a 2% annual pace. Private-sector deleveraging is now visible and, although credit conditions are still impaired, signs are emerging of a revival in household borrowing. More importantly, the housing market is picking up. Housing starts are rising rapidly, and prices have stopped falling. Now that the household saving rate has stabilised, consumption should grow in line with compensations. Even so, the recovery remains fragile. The global slowdown has put a drag on exports, and equipment investment has dangerously weakened over the past few months. Moreover, despite a relatively sustained pace of job creations, the weak rise in hourly wages is putting pressure on wages. Against this backdrop, Anton Brender, chief economist at Dexia Asset Management, said,
“The newly elected Administration’s ability to reach a compromise to head off a ‘fiscal cliff’ is paramount. If it is able to do so, growth should remain near 2% in 2013.”
In the euro zone, three years after the recovery began private-sector agents’ spending behaviour remains cautious, particularly in peripheral countries. While the saving propensity has declined slightly in core countries, it has remained unchanged in peripheral countries. In the latest, fiscal restriction therefore implied a parallel improvement in current account balances. However, given the rather weak global growth, this improvement could only be achieved through a fall in imports and, hence, in domestic demand. In these countries, the high level of fiscal multipliers has undermined their strategies for a rapid return to budget balance. The ECB’s introduction of the OMT program late last summer marks a turning point in handling the crisis. Florence Pisani, economist at Dexia Asset Management, added.
“As long as economic activity continues to contract, the crisis cannot be brought under control”. On this point, the latest indicators are not very encouraging. The worsening in the labour market is dragging down consumption, and productive investment is shrinking. Only euro zone exports to the rest of the world are providing some support. “In this environment, economic activity should, at best, stagnate in 2013. Most importantly, despite a slightly more flexible approach to budget rebalancing, the risk that some major euro zone countries (Italy, and even France) will, eventually, fall into the ‘austerity trap’ cannot be ruled out,” Pisani, said.