High fives for a five-year high

A growing data set shows the global economy at its strongest state in five years, and points to a potent lift in 2013. It could be enough to see the Reserve Bank stop cutting and the dollar move to $US1.10.

The global economy is looking the best it has for at least five years and Australia will be an undoubted beneficiary of what could be the start of a strong economic expansion. It could be very exciting to see the world record solid and reasonably broadly based economic growth.

The global pick-up is so favourable that it is getting more likely that there will be no more interest rate cuts from the Reserve Bank of Australia and the Australian dollar could quickly move to $US1.10 and more in short time.

Last week saw yet another rise in global share prices, a further normalisation of global bond markets and a lift in commodity prices. The rapidly building optimism for the global economy is not just based on these market moves, but also on an increasingly large set of economic data which is pointing to a quite potent lift in economic activity during 2013.

In the US, jobless claims are continuing to trend down and the housing market is recovering at a solid pace, admittedly from deeply depressed levels. But a pick-up is a pick-up. Jobs are being created at a decent pace and the weak US dollar is enabling the country's export sector to add growth. The US outlook is also buoyed by the fact that the Federal Reserve is implementing the easiest monetary policy ever seen and will not end the super stimulus until the unemployment rate is heading below 6.5 per cent. The market knows: don’t fight the Fed.

In China, the favourable news rolls on with GDP growth recovering in the fourth quarter and retail sales, industrial production and even inflation all building upward momentum into the final months of 2012. What makes 2013 look positive for the Chinese economy is the continued rollout of infrastructure stimulus spending, which is likely to underpin growth for some time to come. A still under-valued yuan is helping the export sector to growth strongly.

In India, the world’s third largest economy, the World Bank is forecasting GDP growth to lift from 5.5 per cent in 2012 to 6 per cent in 2013. This is despite troubles on the budget deficit and the Reserve Bank of India's inability to ease monetary policy more aggressively, due to persistently troublesome inflation pressures. The current market consensus is for GDP growth to be a little above 6 per cent, which will see India making a strong contribution to the global economic performance in 2013.

In Japan, despite almost two decades of false and usually flawed policy settings, the new government of Prime Minister Shinzo Abe appears to be going hell for leather to finally, exasperatingly, implement policies to get Japan out of its deflationary malaise. If the policy agenda is even partly successful in having the Bank of Japan raise its inflation target to 2 per cent, boosting quantitative easing and embarking on fiscal stimulus, Japan may well make a decent contribution to global economic activity over the next couple of years.

For the eurozone, the problems remain huge and there is no doubt that Europe is the weakest link in the global picture. That said, expectations for the eurozone are so low that even a reduction in bad news is seen – by the markets at least – as being good news. The path to sovereign debt consolidation appears to be on track, the European Central Bank keeps reiterating its commitment to do "whatever it takes” to hold the eurozone together and there are signs on some of the leading indicators, such as business confidence and retail spending, that a turning point is near. If the eurozone was to grow at even 0.5 to 1 per cent this year, versus current expectations for a small fall in GDP, the relief and injection of optimism would likely be powerful.

From the lows registered during 2012, the bull market in global stocks is impressive.

From the 2012 lows, the US S&P 500 index is up 16 per cent; China’s Shanghai Composite Index is up 18 per cent; India’s SENSEX stock market has risen over 25 per cent; the German DAX is up 29 per cent; the Japanese Nikkei 225 is up 32 per cent and even the ASX200 is up 20 per cent.

It is a similarly upbeat situation in the bond market, with a clear rise in government bond yields in the US, Germany and Japan in the last few months while yields are sharply lower in what were problem countries such as Greece, Spain and Italy. The market is increasingly confident that the eurozone will hold together and with that, growth and confidence will slowly return.

Of course, there are risks and potholes ahead: no economy or market moves are ever in a straight line up or down. That said, the easiest monetary policy the world has ever seen is yielding economic and market rewards.

Easy policy is working, at least for now. For the sake of the 30 million people unemployed in the OECD, it is to be hoped that this easy policy continues to work.

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