Analysts at Nomura Securities say 2013 is likely to be another year of slow-growth around the globe. They list 3 big macro causes of the slow growth:
1) Echoes of a burst bubble
One reason for the continued weak performance of developed markets is the lingering repercussions of the bursting of the credit bubble five years ago. Household, corporate and financial sector balance sheet restructuring remains a theme across many countries, which is limiting leverage in the system and rendering consumption growth more a function of income growth. The post-crisis push for deeper financial sector regulation is adding a further headwind to global growth. To illustrate using the Basel 3 regulatory framework, this increases banks‟ capital charges and forces them to rely on longer-term, more expensive funding. As such, banks are growing more discerning over their use of their balance sheets, resulting in spreads between lending rates and the policy rate structurally widening.
2) The ongoing eurozone crisis
A second key reason for the weakness in global growth is the continuing eurozone crisis. Policy settings in the eurozone are deeply restrictive, with governments implementing a policy of procyclical fiscal tightening. Moreover, peripheral countries face a zero-bound problem, which is made worse by weakness in domestic banking systems resulting in a break in the transmission mechanism from low policy rates to broader lending rates. In short, Europe is in an unstable equilibrium, with a deepening growth crisis belying the European Central Bank’s (ECB) efforts to address the financial crisis. We expect eurozone GDP to fall by 0.8% next year following a decline of 0.5% in 2012.
Europe’s current policy settings seem incompatible with a notable economic recovery over a meaningful timeframe, and in peripheral markets the outlook is for depression rather than recession. In Spain, we expect GDP to fall by 3.0% next year and by 1.5% in 2014, while we forecast Greek growth of -4.2% for 2013, which would be a sixth consecutive year of recession. (The question of official sector involvement in Greek debt relief, and indeed the stability of the country‟s presence in the euro, should remain sources of uncertainty in 2013.) Europe is set to remain a heavy weight on global growth over the medium term. Needless to say, Europe’s inability to grow means that solvency concerns will remain elevated in the peripheral economies in 2013, and we see a risk that these concerns creep into some semi-core markets, such as France.
3) Pro-cyclical fiscal austerity
A third constraint on growth is the extent to which fiscal policy restrains demand. In the US, even if the fiscal cliff is smoothly traversed, our US research team notes that current policies will see fiscal policy reduce growth by 1 percentage point (pp) next year (if we go over the fiscal cliff permanently, then clearly a deep, double-dip recession looms). We have already noted the procyclical fiscal policy in the eurozone that is helping to push many countries into unstable equilibriums, while we do not expect the UK government to blink in the face of anaemic growth, and we assume it will continue efforts to rein-in the budget deficit.
However, one developed country that might buck the trend of fiscal restraint is Japan. Postearthquake reconstruction spending should remain a continued support to economic growth, but one possible additional spur to consumer demand is the anticipated consumption tax hikes in 2014 and 2015. As was seen before Japan’s last consumption tax hike on 1 April 1997, this has the potential to see consumers bring forward their spending plans. Of course, the experience of 1997 is not a happy one for Japan. The consumption tax hike saw growth slide over the subsequent 12 months, primarily due to the deterioration in financial stability and the Asian economic crisis. However, we are confident that history will not repeat and our economic research team is comfortable in assuming that positive growth can be maintained in 2014 after a tax hike in April is implemented.
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