CATERPILLAR: This Is What The World Will Look Like In 2013

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Caterpillar Inc. posted its 3Q earnings report, showing a 5% increase in sales and revenues of $15.7 billion.However, this earnings report goes beyond the call of duty.  Not only does Caterpillar provide financial data.  The capital goods manufacturer offers detailed projections on global economic activity and recognises material threats.

Caterpillar’s guidance addresses central bank monetary policy, regional growth projections, and industry-specific data. Their projections have always been a useful harbinger of economic activity to come.

Management does not expect the U.S. to fall into a recession in the next year — even with the looming fiscal cliff — but that low growth will continue.

Expect more monetary easing from central banks

'Average interest rates in developed countries are already below the lows reached during the financial crisis, so prospects for lower rates are limited. However, we expect central banks in the larger economies to inject additional liquidity into banking systems to help drive increased lending.'

Source: Caterpillar Company Filings

Monetary easing will spur credit and spending growth

'We expect that additional increases in liquidity along with measures to encourage bank lending will drive more credit and spending growth. Since the year will likely start weak, we are only expecting economic growth in developed economies of about 1.5 per cent in 2013, with some upside potential.'

Source: Caterpillar Company Filings

The U.S. is looking up, but growth will be slow

'In the United States, the Federal Reserve's new emphasis on employment, along with signs that banks are increasingly willing to lend, are positives for private sector economic growth. Overall, we expect about 2 per cent economic growth in the United States for 2013.'

Source: Caterpillar Company Filings

U.S. construction will rebound thanks to an improving economy and low interest rates

'U.S. construction activity, which is coming off a 30-year low, is expected to fare better in 2013. Low mortgage interest rates, increasing employment and a near record low inventory of new homes will likely lead to an improvement in housing starts to about 950 thousand units in 2013. We expect nonresidential construction will benefit from lower vacancy rates, ageing stocks and favourable interest rates.'

Source: Caterpillar Company Filings

E.U. disintegration is the biggest risk to the global economy

'We do not see signs that governments in the Eurozone and the European Central Bank will change economic policies to deal with recession, record unemployment and social unrest. Consequently, we are expecting only marginal growth in 2013, and construction activity will likely remain weak.'

Source: Caterpillar Company Filings

The Bank of Japan's monetary easing will combat deflation but fail to boost growth

'The Bank of Japan is facing increased pressure to aggressively battle deflation, and we expect it will increase liquidity further. However, recent economic weakness is likely to persist well into 2013, resulting in economic growth below 1.5 per cent.'

Source: Caterpillar Company Filings

Construction will rise, but mining will slow in Australia

'We expect low interest rates will benefit construction in Australia, but mining investment is likely to slow. We expect less than 3 per cent economic growth in Australia for 2013.'

Source: Caterpillar Company Filings

Developing economies will continue to grow more than developed economies

'Developing economies, while slowing, have fared better than developed economies and are expected to respond more favourably to recent policy easing. We expect growth in these countries will improve more than a half percentage point in 2013 to around 5.5 per cent.'

Source: Caterpillar Company Filings

Monetary easing will drive Chinese construction and GDP

'In China, banks have been increasing lending, and the government announced acceleration of infrastructure programs. We expect additional easing in 2013 and project economic growth will improve to 8.5 per cent. Construction activity and demand for commodities will likely increase.'

Source: Caterpillar Company Filings

Economic performance of other Asian countries will mirror China

'We expect economic growth in other Asian countries will improve as well, on average about a half percentage point. Better growth should benefit construction.'

Source: Caterpillar Company Filings

Improving demand to drive commodity prices higher

'Better world economic growth is expected to improve demand for most metals. We believe the softness in 2012 prices occurred in response to weaker demand, not excessive supply capacity. Consequently, our outlook assumes copper prices will increase from an average $3.60 per pound in 2012 to $3.75 in 2013. China port iron ore prices are expected to increase from $130 per metric ton in 2012 to $135 in 2013 as steel production increases.'

Source: Caterpillar Company Filings

Brazil will lead the Latin American economies. Rising commodity prices benefit African economies

'Economic growth in Latin America is expected to improve to almost 4 per cent in 2013, driven primarily by a rebound in Brazil. Economic growth in Africa, the Middle East and CIS should be around 4 per cent. Slightly better world economic growth and higher commodity prices should benefit these regions.'

Source: Caterpillar Company Filings

The natural gas supply glut to keep coal prices depressed

'Abundant supplies of natural gas at low prices will likely continue to pressure U.S. coal demand and prices in 2013. We expect Central Appalachian coal prices to average about $65 per ton in 2013, up slightly from an average of $63 per ton in 2012. We expect prices in other countries will follow similar patterns, and Australian thermal coal should increase from $94 per metric ton in 2012 to $98 in 2013.'

Source: Caterpillar Company Filings

Slowing demand for oil will keep prices flat at 2012 levels

'We expect oil demand next year will grow at about half the rate of overall economic growth. Worldwide production is at a record high, and producers should be able to accommodate the increase in demand expected in 2013 without tightening supplies. We project Brent crude oil will average about $110 per barrel, or about the same as in 2012. The West Texas Intermediate oil price should increase slightly to near $100 per barrel as the ability to send more oil to the Gulf of Mexico is reducing local surplus supplies.'

Source: Caterpillar Company Filings

Without policy changes, E.U. economies will continue to falter

'We believe that the Eurozone is the most significant risk to our 2013 economic outlook. Economic policies in Europe have led to another recession and intensified pressure on the Euro. In addition to concerns about growth, we believe there is risk that some countries may pull out of the Euro.'

Source: Caterpillar Company Filings

The fiscal cliff is weighing on business and consumer confidence

'The United States faces substantial economic risk as tax increases and government spending cuts will occur unless the government acts to prevent them from taking effect. While we expect that the government will act, the longer it takes and the more divisive the solution, the more it will hurt business and consumer confidence.'

Source: Caterpillar Company Filings

A pre-emptive interest rate spike would be a threat to world economic growth

'In assessing the last two years, we concluded the financial crisis left many economies in fragile condition and that quickly raising interest rates once the recovery started was a bad idea. Although most central banks retreated, the impact contributed to a decline in world economic growth from about 4 per cent in 2010 to less than 2.5 per cent in 2012. Business confidence deteriorated and another round of investment cutbacks is beginning. We are concerned that central banks will be too quick to raise interest rates when growth improves, again preventing the world economy from completely recovering from the financial crisis.'

Source: Caterpillar Company Filings

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