Back to the future – expectations for global growth
Guy Cameron is director at Edinburgh-based fixed income investment firm Cameron Hume.
In 2010, global five-year growth predictions were set intentionally low because of the lingering effects of the Global Financial Crisis (GFC). In the half-decade that followed, each of the world’s major regions failed to meet even those modest expectations.
The outlook for the next five years is less bright than the five-year outlook was thought to be in 2010, partly because of the slow healing after the GFC, but also because of the scale of unforeseen problems in the eurozone and the weaknesses exposed in the economic models of the BRIC countries.
Against that background it’s unsurprising that safe haven currencies and bonds have appreciated.
The IMF’s twice-annual World Economic Outlook (WEO) provides a country-by-country assessment of the global economy and its mid-term prospects.
As its forecasts rarely (never) spark controversy, we can conclude that they are invariably close to consensus expectations. Just as expectations proved to be inaccurate in 2010 we believe today’s five-year forecasts are also likely to be wrong.
Nevertheless the world is in a better state than it was in 2010. It is surprising, therefore, that projected yield curves are flatter today than in 2010. Term premiums in bond markets should be greater, which would make projected yield curves steeper than they are.
We’re confident that the variety of economic performances and monetary policies of key countries are creating opportunities for active management and we expect the next five years to offer as many opportunities for global bond managers as the last five.
Our comparative confidence is based on an in-depth analysis of the components that formed the consensus expectations of 2010 (as defined above) and consideration of the performance of currency and bond markets in the light of this experience.
The reasons for the poor growth yield post 2010 are threefold:
• The lingering effects of the GFC, which have been greater than predicted;
• The eurozone’s pedestrian and poorly coordinated response to its fiscal and banking crises has undermined the recovery;
• The shift of the Chinese economy from manufacturing and investment to consumption led growth bringing an end to the commodity boom. This has had a direct impact on growth in some economies and in others revealed misallocated resources and poor governance.
Decisive drivers included the varying pattern of growth in the eurozone and growth disappointment in Brazil, Russia, India and China, the BRIC countries.
Ireland, the Baltic States and Germany had a notably better experience than the rest of the eurozone. In the case of the Baltic States they started with their own currencies, which took some of the burden of dealing with the GFC, but they were also quick to reform and reduce indebtedness.
Ireland had a particularly severe banking crisis, but dealt with it decisively, reducing government spending, public sector wages and benefits and recapitalising the banking sector. Germany’s growth was in line with expectations and this may have shaped its attitude to the causes and remedies of the Eurozone crisis.
Germany has been unsympathetic to the pleas of other eurozone members, being a consistent advocate of fiscal austerity and economic reform, and has been slow to accept the ECB’s various stimulus measures. The very different experience of Germany from the other eurozone members is one reason why policy coordination has been so poor.