World economic growth more positive but still risky

In the current global economic climate solid growth is a rare phenomenon. And growth, where it exists, tends to be more prevalent in emerging-market economies. “The accommodative monetary conditions in the developed world should result in G3 nations’

In the International Monetary Fund (IMF) World Economic Report published on 17 April, the IMF raised its 2012 global economic growth forecast to 3,5% from the previous 3,3%. However, it stressed that the recent recovery is “very fragile” and that the eurozone debt crisis, as well as the increase in oil prices, poses a significant threat to the economy.

“The IMF also cautioned the European Union against excessive austerity, which might hurt growth,” says Stewart. “It urged the European Central Bank to restart its bond purchase programme, carry on with its non-standard measures and cut the refinance rate.”

With regard to Spain, which many see as the next probable big headache in the eurozone, the IMF said the country’s fiscal adjustment balance is correct and praised its labour reform and bank recapitalisation plans. “Nevertheless it expects the Spanish economy to shrink by 1,8% this year,” says Stewart.

Regarding the possibility of a country undergoing a disorderly default in the eurozone, the IMF said it would be difficult to predict the outcome of such a situation. It did not rule out the possibility that “if such an event occurs, it is possible that other euro area economies perceived to have similar risk characteristics would come under severe pressure as well, with full-blown panic in financial markets and depositor flight from several banking systems”.

The probability of negative output growth in 2012 is about 55 per cent for the euro area, 15 per cent for the United States, 14 per cent for Japan, and less than five per cent for Latin America. According to the IMF report, new shocks or policy mistakes could push one of the major advanced economies into prolonged deflation.

“Deflationary pressures are prominent in periphery economies of the eurozone, like Ireland, Greece, Portugal and Spain,” says Stewart.

Meanwhile, the European Commission released a statement on Tuesday stating that the Troika does not see the need for more funds for Greece. They mentioned that the country should now concentrate all its efforts on implementing the plans for reform in order to reach the debt target in 2013/2014.

“While Spain remains a concern, we continue to believe policy-makers in the eurozone have the political and fiscal will to prevent a catastrophe and to pull the eurozone out of its current predicament, albeit at a slow and painful pace,” says Stewart. “And while China’s growth has begun to slow, we believe with the transition from export-led growth to consumption-led growth that is currently underway, China will not experience a hard-landing scenario.”

In summary, while asset prices in general are not cheap (or overly expensive), as long as interest rates remain low, the Plexus investment team believes investors should continue to hold equities on a close-to-benchmark position in favour of the alternatives, namely cash or bonds. “We are still, however, very much aware that the world remains a risky place for investors.”

Graph A

In the IMF World Economic Report published on 17 April, the IMF raised its 2012 global economic growth forecast to 3,5% from the previous 3,3%.

Source : IMF, World Economic Outlook April 2012

Graph B

The probability of various global economies experiencing deflation by Q4 of 2013.

Source: IMF, World Economic Outlook April 2012