Macro Economics - A cautiously optimistic outlook supports the road towards higher growth and reinstates stronger business confidence

Overview

The global economy is getting better. The dark clouds that were piling up towards the end of 2011 have now spread, as brisk winds of change are beginning to restore optimism. However, the economic crisis is still not over and many tough political decisions have to be made before we can stand on top of a sustainable recovery. Three factors give us reason to believe things are getting better:

Global economy:
The global economy is getting better. The dark clouds that were piling up towards the end of 2011 have now spread, as brisk winds of change are beginning to restore optimism. However, the economic crisis is still not over and many tough political decisions have to be made before we can stand on top of a sustainable recovery. Three factors give us reason to believe things are getting better:

a) In particular, stronger US key figures have buoyed market confidence;
b) Central banks, in particular in the Western hemisphere, have saved the banking system from a full scale lock-up by massive injections of money;
c) Improved sentiment in the financial markets.

Some of these may be interconnected, but they all contribute significantly to the improvement of the global economy. Going forward, the “new” issues for the respective markets remains different, but they will all face energy costs as a common denominator.
Renewed business optimism seems to have arrived together with the Spring in the northern hemisphere. An increase in optimism around most of the world resulting from improved global economic conditions has businesses preparing for growth in the coming months, according to the latest edition of KPMG’s Global Business Outlook. Higher levels of investment, greater activity and increased staffing are high on the agenda.

An example on this positive development amongst the so-called BRIC-countries is Brazil, which stands out as one of the most bullish stories right now. Setting sails for 3.0-3.5% growth this year and helped firmly by a strong domestic market, Brazilian manufacturers have gained more confidence in demand to pick up from key export markets, also in the coming months. Key risks to this growth are the possibility of a setback in the US recovery, a hard landing in China and a domestic credit bubble. In addition to the positive story though, is a successful battle won against inflation which is now heading South around 6%, coming down from the 7.3% peak in consumer prices some six months ago.

US:
More and more key figures from the US economy are painting a positive picture of an economy moving in the right direction. But in order to make sure this development stays on the positive track, the Federal Reserve Chief, Ben Bernanke, sees a continued need for expansionary financial policies. Mr. Bernanke acknowledged the very positive advances made in the employment fields, with the unemployment rate now at 8.2%, down from 9.0% in March 2011. This improvement in the rate was seen as a restoration of the massive job cuts in the wake of the Lehman Brothers crash in September 2008. Nevertheless, a further improvement in the unemployment rate would require a more powerful expansion in both supply and demand.

One of the few flies in the ointment is The Conference Board Consumer Confidence Index. The headline indicator revealed a small decline in March following the sharp increase in February. It was nonetheless more important to notice that The Present Situation Index, (which comprises one half of the headline indicator) now stands at the highest level since September 2008 – implying that consumers still feel the economy is hanging on to the recent momentum despite a bit bleaker short-term outlook (as The Expectations Index contracted).

Asia:
The recent signalling of slower GDP growth in China gives reason to believe that we could see some stimulus to the economy during 2012. The measures already taken have been monetary, and more of that kind are likely to follow. China has firmly established itself as the world’s second largest economy.

Looking at industrial production data – last year ended at a moderate pace, confirming the weaknesses that the PMI figures had been indicating. As the industrial sector accounts for more than 40% of the Chinese economy, it is of great importance that the momentum is maintained. Recent data showed growth of 11.4% in the first two months of 2012, down from 12.8% in December and a far cry from the consensus estimate of 12.5%. The official target for 2012 is 11%, as the government aims to save resources for promoting industrial upgrading and growth mode transformation.

In the meantime, news coming from the former second largest economy in the world, Japan, points towards a return to slow growth following the drop in GDP last year in the wake of the triple disaster.

Just as in China, inflation is trending downward in India and economic growth is settled at lower rates not seen around for the past decade. To spur economic growth in India, the Reserve Bank of India has begun easing the monetary policy, with a reduction of the reserve requirement rates. This move should hike lending and support growth. India is expected by the IMF to see a 7.0% GDP growth in 2012.

EU:
Following the successful debt swap exercise in Greece, the tensions in the Eurozone have come down. Greece is temporarily off the hook, as the risk of a disorderly default in the short run is eliminated. The financial markets are now focusing on the pitfalls in Portugal as well as the recent Cinderella development that has shown itself around the Italian economic situation since the takeover by PM Mario Monti and his cabinet.

As forecast by the IMF amongst others, the Eurozone is likely to slide back into recession in 2012. The most recent Markit (flash) Eurozone PMI Composite Output Index support this forecast, as it fell from 49.3 in February to a three-month low of 48.7 in March. The debt situation may have steamed off for a while leaving an increased room to focus on the much needed growth and job creation across Europe.

The dark clouds are far from all gone, but enjoy the optimism and make the most of it – as it might stick around for longer if you believe in it.

Outlook:
Put aside the apocalypse and let the four horsemen of economic sustainability ride on. It remains the key towards higher growth and higher employment that the numbers of financial indicators for key economies, which have improved over recent months, stay on that course. Continued support from the various Central Banks remains crucial in making this happen.

The continued high oil prices are not supportive for global GDP growth, neither is the still struggling housing markets in the US, some European countries and some Asian countries.

Shipping demand will definitely benefit from a more calm and positive macroeconomic environment. So the challenges for politicians across the Globe, and especially in the EU, are still very tangible and they must focus on establishing the right economic framework. This is necessary to make growth stay around and to stimulate consumer confidence and pull private consumption to a higher level.

in Copenhagen, DK

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