Sent: 05-02-2013 09:24:02
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Good News as 2013 Begins
Good News as 2013 Begins
A lot happened over the holiday. The possibility of global financial ruin seems to have receded as 2013 commences. Financial markets appear far more inclined to accept the possibility of a global economy making gradual headway against the most serious macroeconomic adjustment problems.
The biggest headlines over the holiday came as the US Congress averted the so called fiscal cliff. There was no economic solution. The politicians who created the fiscal cliff simply legislated away their self imposed obligations to come up with a debt reduction plan.
More recently, wiser heads have prevailed among Republican politicians who have baulked at picking a fight over an extension of the government's debt ceiling. That takes another confidence sapping fight off the agenda but still leaves the largest economy mired in a debate about the role of government and the distribution of the fiscal burden.
US President Obama showed no sign of a backward step in his inauguration speech last week. The fiscal fight will be ongoing through 2013 and, most likely, well beyond.
Nonetheless, there was progress of sorts. Increasingly unpopular Republicans have been outmanoeuvred. Having lost successive political battles, they are coming to terms with the need for more sophisticated and nuanced ways to pick their fiscal fights.
Despite the fiscal cliff headlines, a piece of economic research might have been the most important development over the holiday. Olivier Blanchard, the chief economist at the IMF published a working paper (Growth Forecast Errors and Fiscal Multipliers) which revised the Fund's previous assessment about the impact of fiscal austerity on adjusting economies.
In short, the research mea culpa admitted that IMF economists (as well as others) had underestimated the impact on economic growth of fiscal consolidation. On their fresh assessment, the multipliers from government spending cuts and tax increases are some 2-3 times greater than the previous research at the IMF had suggested.
The reappraisal of the short term impact on growth of fiscal austerity measures has forced the IMF to reconsider how aggressively it pushes for fiscal adjustment in Europe and the USA. The IMF, long criticised for an unthinking and callous push for spending cuts, is now talking more moderately about the magnitude of the adjustments it might recommend and how quickly they should be implemented.
The newly minted tone is good for global growth. The IMF is still pulling back its growth forecasts for 2013 but the 0.1 percentage point revision announced in its latest forecast review on 23 January hints at the cycle of downward adjustments coming to an end. The current forecasts are for 3.5% in 2013 (up from 3.2% in 2012) and 4.1% in 2014. These possibilities compare well with the 15 year average growth rate prior to 2008 of 3.8%.
The momentum will be more important for markets than the precise numbers. The key question for markets (and the Australian economy) in 2013 will be whether growth accelerates through the year. There are signs that it will.
In Europe, the slowest growing part of the world, the worst of the recession should be over during 2013 with a rising possibility of growth around 1% in 2014; not spectacular but better than two years of contraction.
Japan's more aggressive approach to stimulating the economy after the election of Shinzo Abe in mid December points to stronger growth there through 2013.
Statistics over the holiday from China suggest manufacturing output is beginning to expand more quickly with GDP growth in 2013 possibly topping the 2012 outcome by around a half of one percentage point.
Similar patterns are evident in Latin America and Africa.
An acceleration in global growth is a critical precondition for improved cyclical conditions in the raw material commodity markets. The growth outlook does not necessarily imply higher prices during 2013 but stronger growth does imply an acceleration in raw material usage rates and, with that, higher rates of capacity utilisation and a constraint on inventory accumulation.
Having spent over four years plagued by constantly disappointing economic data, the IMF prognosis is being treated sceptically but markets are appearing less sceptical than they were for most of the past four years.
The widely quoted Chicago Board Options Exchange S&P500 options volatility index has fallen to the levels which prevailed in the years immediately prior to 2008 and during the early 1990s. Nervousness has dissipated. The S&P500 is headed toward its largest January gain since 1989.
Statistics released by the Investment Company Institute in late January showed that US domestic equity mutual funds had received two successive weekly fund inflows setting the scene for the first positive monthly flow in nearly two years.
At the company level, Apple lost its mantle as the world's most valuable listed company to Exxon. As well as the mythology surrounding its innovation record, Apple had been a beneficiary during 2012 of the flight to high profile brands capable of offering dividend growth.
The fall from grace does not mean Apple is poorly run or floundering but it had been valued for perfection by faithful followers who were anticipating yet new gizmos to transform their daily lives. This was always a risk.
Kodak, Xerox, Palm, IBM, Commodore, Sony, Nokia and Research in Motion are just some of the examples of companies that had seemingly dominated their technology segments in relatively recent times but ran out of puff either because they lost their power to innovate or because others showed more imagination or their ideas became so widely accepted that they lost their competitive edge.
Apple might have transformed our daily lives in much the same way Gottlieb Daimler and Karl Benz once did. Their idea was so compelling and the application so pervasive that, today, no-one is entitled to claim it for their own.
The recent Apple price action suggests, as 2013 begins, that markets are responding more to the special situations encountered by companies as a heavier emphasis is placed on valuation and less on personal connection with brands as a response to perceptions of risk.
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