Strongest growth will be in emerging Asia, LatAm, says Invesco’s Greenwood
John Greenwood, Invesco chief economist, says in his latest quartely outlook that the economies of emerging Asia and Latin America will provide the strongest growth.
The economic recovery has been strongest in those economies where balance sheets are least impaired -primarily the emerging economies of Asia and Latin America, and those developed economies such as Australia, Canada, Sweden and Germany that avoided the worst excesses of the housing and credit bubble.
Among the crisis-stricken, underperforming developed economies there is a clear ranking becoming visible: those that have repaired their balance sheets most are doing best in terms of economic growth (relative to their potential) and stock market performance. Thus the US is leading the way, having reduced by half the debt-to-GDP ratio that had built up between 2000 and 2008.
The UK has made much less progress in de-leveraging, and consequently growth is lagging that in the US. Meanwhile much of the euro-area is still in recession, having hardly deleveraged at all, with growth in the core economies adversely affected by the long depression in the periphery. Although emerging market economies generally have less indebtedness, and as a result enjoyed strong recoveries in 2009-11, their high degree of export-dependence on developed markets has reduced their growth rates in 2012 and will continue to do so in 2013.
In the United States I expect 2-3% growth at best during some quarters of the calendar year as tax increases agreed under the “fiscal cliff” negotiations over the year-end and spending cuts implemented by the “sequester” restrain both private and federal activity levels. There should be some offset from recovering housing and business investment, but I expect overall growth will continue to be sub-par.
In Europe and the UK the picture remains more subdued with growth restrained by public sector austerity and weak wagegrowth in the private sector. In the UK the Bank of England is likely to embark on additional QE during the year, possibly before the new Governor Mark Carney takes over in July, but in Europe the ECB has been shrinking its balance sheet while commercial banks reduce their lending to customers. The Cyprus crisis is likely to exacerbate the mood of risk aversion. Inflation remains a challenge for the UK, but in the euro-area there could be a risk of deflation within a year or two.
In Japan the new government of Shinzo Abe is pressing forward with both monetary and fiscal expansion to overcome deflation, but may have to wait until it gains seats in the Upper House elections in July before it can ensure passage of its more ambitious restructuring plans. Another reason why the July election matters is that the current constitution requires a two-thirds majority in each house of the Diet to be amended. If PM Abe achieves this, General MacArthur’s 1945 constitution can at last be updated.
In the emerging economies growth will necessarily remain largely dependent on domestic drivers such as consumer and private capital spending as no strong rebound in exports is in prospect. As such structural re-balancing in economic activity requires years rather than months; the results will be slow to show up in enhanced growth rates. Accordingly, growth is likely to be slower than full potential in the emerging economies in 2013. Inflation should only be a problem in a small minority of these economies such as Argentina and Venezuela.