Quarterly Economic Update – Dec 2013

This is my personal view, based upon many years researching and reviewing the work of others “standing upon the shoulders of giants”

This commentary seeks to provide guidance over a 3 -5 year timescale.


Taking the three big economies of the Eurozone in turn:

As expected, Angela Merkel was re-elected and is forming / has formed the grand coalition with her political opponents. From an economic guidance perspective, this means little change to the status quo – perhaps some adjustments in the social and benefits arena – but nothing to derail the progress of the German economy.

In France, president Hollande appears to be making fewer blunders but is not addressing the challenges of the bloated state, generous retirement provisions and onerous individual and corporate taxes.

In Italy, the Berlusconi era has finally drawn to a close – although there is a rumour that his friend, President Putin of Russia, might appoint him Russian ambassador to the Vatican! That would give the former PM a diplomatic passport and immunity from house arrest. Politically, there’s no strong leadership and economic reforms are not happening. There will probably be yet another election in 2014, but it’s likely to be just another shuffle of the same pack of cards.

The southern fringes will continue to be influenced by the North African troubles; Egypt is unstable, Syria in the middle of a brutal civil war. There will continue to be a drain on Turkey, in particular but also continued refugee crises across the Mediterranean. Economic news from Portugal, Spain, Greece and Cyprus is minimal, which is good news. It may be time to call the end of the Euro shocks.

My forecast:
Over the forecast period, the Eurozone as a whole will probably show modest growth rising to perhaps 2.8% in 2016, but individual countries will still perform at markedly different rates. All of the Latin countries are still in the recovery ward, but showing signs of better health. Germany is likely to be more stable, with growth gradually improving from 2014 – 2016/7, perhaps peaking at 3.5%. I would not be surprised by some relatively disappointing growth figures for Germany in a couple of quarters of 2014. Real growth for Germany requires more of a recovery in the southern fringe.

France continues to struggle and 2014 does not look to have a favourable out-turn. Recovery will require political change, either of leadership or of direction.

Italians are used to weak / no government and growth of 1.5 – 1.8% should be achievable in 2014 with gradual improvement through to 2016.

Smaller countries, particularly those in Eastern Europe, offer real potential for growth. Ireland appears to have weathered the crisis and has a positive outlook, and general acceptance of their fate (albeit still with some political upheaval) is appearing in Spain, Greece & Portugal.

Despite the headlines screaming about the good economic news from the last few months, we are not completely out of the woods yet. In my June commentary I referred to further problems emerging in the financial services sector and they were duly uncovered. It will take several years for that sector to return to pre-crisis levels of contribution to the economy.
The recent statistics do show improved activity across almost all sectors, which is good news, but there is a disconnection between the employment statistics and the output statistics. The implication is that we are now much less productive than was the case in 2007. The Bank of England has set a “knock-out” for increasing interest rates only when unemployment falls to 7%. It may be that productivity increases absorb some of the growth before businesses take on more staff; interest rates are likely to remain at present levels through 2015.
The longer term significant risk is energy supply and policy; we’re heavily reliant upon imported gas, have not developed new nuclear and the environmentally friendly generation is slow to fill the gaps. Shale oil & gas would appear to be favoured technology.
Growth rates of 2.5% in 2014 and 2.8% in 2015 seem likely.
Prospects in the US remain very positive, largely due to shale gas. The most positive politico-economic news in several years is the recent agreement, yet to be passed by the legislators, to withdraw the sequestration imposed by the fiscal cliff and replace it by planned savings.
President Obama has not shown a great interest in business and that seems unlikely to change, so there will be little government stimulus to the economy.
Manufacturing operations are being relocated from formerly low-cost environments (South America, China) to the US to take advantage of the low oil and gas prices. The knock on effect of this transition can be nothing but positive for the US as a whole, with a young, well educated population.
Growth rates of 3-5% during the period to 2016-7

The run up to the sporting events has attracted to worlds attention to the country and given the disadvantaged of the population a platform to protest. There’s an outcry against building football stadia whilst the countries hospitals, roads and housing are in dire need of investment.
A large young population, significant natural resources and gradually improving infrastructure, no doubt given a step change by the World Cup and the Olympics give cause for optimism. I note with interest that Jaguar Land Rover announced a manufacturing facility in Brazil recently. I think that’s a very early move.
Growth rates of up to 6 or 7% are possible in the period to 2016 with the Olympic effect but I’d expect to see a slow- down in 2017-2018, with growth falling back to 4-5%.

Continues to benefit from significant natural resources and will show good growth in the mid to medium term. There’s a substantial middle class that don’t have a political voice and any attempt to represent their opinions is met with repression. Doing business in Russia is challenging and requires that you have the right connections.
Over the medium term, growth of 5-6% is likely. Over the longer term, the big question is what will happen on the political front when Putin goes. That could cause major instability.

Faces challenges from its own political system; it remains a country of great potential with excellent education, the use of English as a business language and a young population. There is vast inequality between the richest and most influential and those who are not so fortunate. It’s noticeable that a court found a colonial era law applicable (it happens to be about homosexuality) overturning a more recent ruling. Businesses face some interesting challenges! Growth rates of 4-5% in the period to 2017

The relatively new leadership have taken some significant steps to eliminate or reduce corruption; there are fewer ostentatious displays of wealth by the political elite and domestic IPO’s (initial public offerings) have been frozen whilst investigations into some very doubtful public companies are carried out. There’s a new atmosphere and some more rigour applied to standards and procedures.
All of this helps to reduce the risk of political disturbance between the haves and the have-nots, so the outlook continues to be positive.
Growth rates of 7-9% are most likely

“Greater China”
I’m loosely defining this area as the countries surrounding China & supplying Chinese demand, from Vietnam and Thailand /Malaysia /Singapore right though to South Korea. These countries have generally good prospects, decent infrastructure and well educated populations. They cannot but benefit from rising demand in China and most have the political stability to take advantage of it.
The possible exception to this is Thailand, where the present PM seems unlikely to survive the current unrest. That makes investment decisions tricky, so perhaps Vietnam or Malaysia will benefit.
Myanmar, the former Burma seems more stable in this quarter than last, but it remains only a few months ago that it was a state ruled by the army.
The political risk in this area is conflict with North Korea, which would heavily affect South Korea.
Growth rates could be exceptional at up to 10 – 12%

It has been a quiet few months for Japan. There’s still the challenge from the Fukushima plant overhanging any prospects for dramatic growth, together with the somewhat sclerotic corporate structures. The worlds’ 3rd largest economy will continue to grow slowly.

The main stories in this region are of course Syria and to a lesser extent Egypt. Both economies are collapsing, and refugees fleeing Syria (in particular) are impacting on surrounding countries. Factor into that mix the long standing Sunni – Shiite divide where it seems likely that Syria is a proxy for Iran’s ambitions to become the dominant player in the region.
The Gulf States have significant natural resources, but Middle East oil & gas is becoming less important to the world economy as Shale Gas, improved efficiency and new discoveries reduce the world’s reliance on the region.
It is difficult to be optimistic for prospects in this region.

The Aussies had a good run up until the end of 2012, but I think they have more reasons to be optimistic about the cricket than about their economy for the next few years.
© Tim Luscombe December 2013

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