Macro Economics - it should go up from here, but not as quickly as we used to think


The year 2012 has been a turbulent one for the global economy and the outlook has deteriorated since our last forecast.
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Slow growth, a still weak financial system, continued fiscal issues in the US and EU and lack of consumer confidence blur the prospects of recovery.

Global economy:
The year 2012 has been a turbulent one for the global economy and the outlook has deteriorated since our last forecast. Now the IMF expects that output will remain strong in many emerging markets and developing economies, but that the advanced economies will experience more sluggish growth in the years to come. The output of the advanced economies is affected by great uncertainty in both the US and within the Eurozone.

To boost GDP growth, legislators in the US must raise the debt ceiling whilst ensuring that medium-term fiscal plans for the country stay sustainable. Meanwhile, in Europe, the Central Bank (ECB) holds an efficient weapon in the battle against recession following the introduction of the Outright Monetary Transaction (Details regarding OMT can be found in the previous Macro Economics report, October 2012). However, the medium term outlook in Europe is still uncertain if not outright weak, as the monetary weapon from the ECB must be consolidated among the members to be most effective, with further economic integration amongst the European Union member states.

Following the drop in demand and consumers’ sluggish appetite for imports in the advanced economies after the financial crisis, the export industries in the emerging and developing economies have been severely hit. Most countries have responded to this by pursuing an expansionary monetary and fiscal policy and in the medium term, the emerging and developing economies should prepare to respond again if the demand from the advanced economies continues to fall short of expectations.

Despite the multiple uncertainties that surround global growth prospects in 2013, BIMCO has elected to be cautiously optimistic, and believes that 2013 will be the turning point on the macroeconomic scene. Recent positive political initiatives underpin this view.

With Obama re-elected at the White House, focus is back on “real matters”. US politicians must act to tackle the “fiscal cliff” and not introduce tax increases and cuts in public spending. Anything else could seriously impact growth.

A leading indicator of consumer demand is housing starts, which rose by 3.6% to 894,000 in October – the highest in over four years. Homebuilding has now climbed so high that it could add to GDP growth this year for the first time since 2005. Moreover, building permits in October were up by almost 30% as compared to the same period last year, despite being down by 2.7% on the previous month. Finally, new and existing home sales have been climbing gradually, facilitated by record low mortgage rates, but the US housing market still has a long way to go before recovering its previous strength.

Good news emerged from China, as the final numbers confirmed the rise above the 50 threshold level of the HSBC/Markit Manufacturing PMI, coming in at 50.5 in November. This was the highest PMI since October last year, representing a cycle that brought about lower GDP growth, as export markets crumbled. Now the indicator signals increasing new export orders and a strengthened demand are linked to Europe and the US by anecdotal evidence.

Bad news emerged from the world third largest economy, Japan, as they released GDP growth for 3rd quarter of 2012 which was down 0.9% from 2nd quarter. Lower exports, in particular to China, and lower private consumption were to blame. On 30 November, the Japanese Government approved yet another stimulus package, roughly twice as big as the stimulus package passed last month. The package worth JPY 880 billion (USD 10.75 billion) will mostly go to rebuilding of areas hit by the March 2011 earthquake, support employment and help cash-strapped small firms. The package is seen by analysts to be too small to cure the faltering economy.

In Korea, GDP is projected to grow by 2.75% this year but to pick up to about 3.5%
in 2013. This is set to come about due to a rebound in exports and private investment.

Meanwhile, in India, economic activity is suffering from waning business confidence amid slow approvals for new projects, sluggish structural reforms and poor external demand. GDP went up by a disappointing 5.2% in annual terms in the third quarter as manufacturing dropped sharply. Hopefully, economic activity is bottoming out, but the prospect for any significant upswing is only seen to be marginal.

The Markit Eurozone Manufacturing PMI has signalled deterioration in manufacturing business conditions in each of the past 16 months. Contractions were indicated for almost all of the countries covered by the Markit survey, the sole exception being Ireland. It is important to note that rates of decline eased in Germany, France and Spain.

The European Union generates a GDP of EUR 12.6 trillion according to the IMF, making it the largest economy in the world. So the importance of the EU in that sense is huge and it highlights the seriousness behind the fact that EU is facing an array of problems, with stagnation being the predominant one. Additionally, employment fell for the tenth straight month, albeit to a slightly lesser degree than in October, with further job losses reported almost across the board.

According to Markit: “The picture is nevertheless starting to brighten somewhat, with the PMI appearing to have bottomed out back in July. Production and employment look set to fall at reduced rates in coming months as export demand slowly revives in markets such as the US and Asia.”

BIMCO continues to believe that 2013 will produce higher global GDP than in 2012 and increased growth in global trade. This is largely based on the latest indications from the IMF forecasts for 2012 and 2013 along the following lines: China up from 7.8% in 2012 to 8.2% in 2013, India up from 4.9% to 6.0%, European Union up from -0.4% in 2012 to 0.2% in 2013 and world trade growth in goods and services up from 3.2% in 2012 to 4.5% in 2013.

The world GDP may grow as such, but in terms of shipping demand, the distribution of trade growth is of immense importance, especially for those shipping segments that may feel the positive effects early.

In Europe, the region’s debt crisis means that business confidence remains fragile and companies continue to focus on tight cost control. Recovery towards previous heights is still out in the future, but the route appears to be set correctly.

Regarding the US, BIMCO expects that policy-makers will act responsibly and take the steps necessary to avoid the “fiscal cliff”. Likewise, BIMCO expects European policymakers to do the same in their quest to return confidence to consumers and bring an end to the debt crisis in the Eurozone. Unless these critical issues are resolved successfully, they will become a burden that drags the global economy in the wrong direction and away from an urgently-needed sustainable recovery. While we remain optimistic, these issues hold the key to “make or break” our forecast in the short and medium term.

Peter Sand
in Copenhagen, DK


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