Drip, drip, drip.
Favourable news on the global economy is trickling in. What a pleasant change this makes from the torrent of economic gloom and that has dominated recent years. While the recent news is encouraging, it is still too early to be confident that this drip feed of news is a sign of a meaningful recovery in the global economy in 2013, but the breadth and variety of what is unfolding is truly refreshing. It sure beats the alternative that has dominated the global economy and markets in the last few years.
Overnight, the German Ifo survey of business confidence was strong. It rose to 102.4 points, which prompted Ifo President Hans-Werner Sinn to suggest, "as the year draws to a close, German companies are more confident about the future.” The rise in the Ifo index matches an earlier purchasing managers index report which pointed to the first rise in private sector output in eight months. As a result of the good German news, the euro rose to 1.33 against the US dollar, a 16-month high.
The World Bank has revised up its 2013 GDP growth forecast for China to an above consensus 8.4 per cent. This favourable outlook for China, according to the World Bank report, was the result of "the impact of easing credit conditions and public investment in infrastructure is beginning to show … the authorities have accelerated the approvals of large projects”.
This World Bank’s assessment of China’s economic prospects comes in the wake of a 10 per cent rise in Chinese share prices since the start of December and a stunning 50 per cent surge in iron ore prices in the last three months. If China can grow 8.4 per cent in 2013, it would lift the fortunes of countries in the Asia Pacific and support commodity prices over the longer term.
This week has also seen Standard & Poor's upgrade the sovereign credit rating for Greece – yes, Greece! The upgrade was a move from junk status to one level higher and S&P cited the success of the Greek government’s bond buy-back and the obvious determination of the Samaras government to meet its fiscal obligations as important developments. The fact that the European Central Bank, European Union and International Monetary Fund have been able to deliver a range of significant policy initiatives to hold the eurozone together was also important to S&P in announcing the upgrade.
In Japan the afterglow from the Liberal Democratic Party's election win, which brings in new Prime Minister Shinzo Abe, has shown up in more confidence in financial markets. Abe’s landslide win was on a platform of additional policy stimulus from the Bank of Japan, including setting an inflation target of 2 per cent. He also wants to boost the economy with renewed economic stimulus from public sector infrastructure spending. These flickers of hope have sparked a rally in Japanese stocks to the point where the Nikkei 225 has risen a stunning 17 per cent in just five weeks. The yen also weakened, which is seen as a boost for Japan’s exporters.
In other positive news, the Reserve Bank of India held interest rates steady earlier this week but sent a clear signal it will be setting monetary policy with a view to underpin economic growth in 2013. In its statement, the RBI noted optimistically that: "In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth from this point onwards. Liquidity conditions will be managed with a view to supporting growth.” This pro-growth objective from the world’s third largest economy is particularly encouraging.
Financial markets are also moving in the direction of a more favourable economic outlook for 2013. In the last few months, share prices are solidly higher in the US, most of Europe, China, the UK and even Japan. Most gains from the mid-2012 lows are in a healthy 10 to 15 per cent range. Share prices only ever sustain a bullish tone when markets have a positive view on the outlook for GDP growth, company earnings and profits.
At the same time government bond yields are rising, even in countries where their central banks have committed to buy bonds. In the last few months, 10-year government bond yields have risen albeit modestly. Like the indications from the stock market, rising bond yields are usually a sign of economic growth optimism.
To be sure, 2013 has plenty of risks attached to it and a sober analysis of the problems of most countries paint a Mount Everest size hurdle to clear. But the recent data flow and market trends are suggesting things just might be turning and that global growth in 2013 could surprise on the upside.