Economic Outlook December 2013

2013: Global economy showed positive traction all the way through.

December was another month with confirming signs that the global economy is on a growth path and critical fundamentals supporting the growth are intact. The leading economies, which are crucial for the global production and trade, are still in a low interest rate environment and inflation is still kept under tight control.

The US decided to begin tapering its quantitative easing (QE) program in December last year. This was somewhat earlier than expected, however another proof that the US economy is on track to grow without FED stimulating the credit and cash markets at the same pace as earlier. However, the tapering is not expected to make the FED hike US interest rates until late 2015 and the speed of tapering will be tracked by labor market data and a continued improvement of unemployment rates as such. According to the FOMC minutes, most officials supported the gradual reduction in QE as they saw waning benefits from it. With respect to the decision to taper, most FED members agreed that sustained improvement in labor market conditions indicated that the Committee could appropriately begin to slow the pace of its asset purchases.

Furthermore, the World Trade Organization (WTO) reached a deal in December intended to boost global trade. The deal was agreed after intense marathon talks in Bali, Indonesia. With 159 ministers signing the deal, the intention to simplify the procedures for doing business across borders should have broad acceptance and hence a fairly good chance to be turned into increased cross-border trade and global welfare growth. The “Bali package”, as the deal has been named, is by stakeholders said to have the potential to add on USD 1tn to world trade if executed in accordance with the intention.

The global credit and equity markets seems to be in a better shape by the end of 2013 compared to the situation in the beginning of the same year. This is a result of a tight control of the banking markets and improved balance sheets due to improved asset quality and retained earnings throughout the year. As such, the banking sector and capital markets are in a good shape by the end of 2013. This is the single most important factor for the global economy on its way to reach SEB’s estimated 3.9% global GDP growth ambition for 2014.

That said, the global economic growth is still fragile when it comes to geo-political issues. We still find the situation in the Middle-East worrying and lately we have also seen that the conflict related to territorial rights between Japan and China has intensified.  Furthermore, we like to add on that the European recovery is still in an early phase and changes in sentiment will probably widen credit-spreads and lift interest rates in the most vulnerable Euro-economies. If so, the expectations of a marginal positive growth in Euroland in 2014 might turn sour and again hit a negative growth momentum.

However, our main message is that the global economy is on a growth track when entering 2014. We find the low interest rate regime, improved labor markets and improving consumer and business sentiment indicators encouraging. As such, we wish 2014 welcome as another year that hopefully will pay satisfactory risk adjusted return on invested capital in the bond and equity markets.