Carmignac maintains its economic outlook unchanged in latest review

Carmignac Gestion’s latest economic outlook and investment strategy note suggests that with the global view unchanged, central banks will need to continue pursuing policies designed to stimulate growth.

Central banks’ determination to support growth and make sovereign issuers more solvent is essential if the debt reduction process is to succeed.

In the first quarter, the macroeconomy and markets generally fared as we had predicted three months ago. Massive quantitative easing in the United States, Japan and the United Kingdom saw equity markets continue their ascent even if the United States was alone in providing any impetus to the global economy. At a foreign exchange level, the transatlantic growth differential caused the dollar to rally, while Japan’s determination to banish deflation led to the yen weakening further.

The global economic backdrop is unchanged. Developed economies are about to be (Europe) or are already (United States) deleveraging structurally, a process that will take several years. This will force central banks to pursue expansionist policies, keeping government bond yields “unusually” low. Indeed, governments’ inability to implement counter-cyclical policies due to the need for fiscal orthodoxy means that central banks alone are having to lay the foundations of sufficient nominal growth (real growth plus inflation) to ease the public debt burden and make it bearable.

In contrast to developed countries, emerging market economies do not have to suffer from deleveraging. That said, the emerging world appears less likely to have a decisive influence on the global cycle.

Their governments are generally not even close to being overindebted: nominal growth has prevented any significant fiscal slide in most cases. However, it seems now that the biggest three emerging countries are unable to play a major role in driving the global economy.

China, like all large exporters, is to some extent suffering from developed countries’ sluggishness and for the moment has done nothing to encourage strong growth at all costs. The new ruling body is still finding its feet and wants to ensure that property prices remain under control. If necessary and when the time is right, respectable inflation should make it possible to boost the economy.

India is heading for the polls, which seems to be limiting any reform efforts following the progress made six months ago, further delaying measures that could stall the deterioration of its current accounts.

As a major producer of commodities, Brazil is suffering from the lack of global momentum and seems to be retreating into a mentality of economic intervention, which does not bode very well for future growth.

However, the healthiness of certain smaller countries such as Turkey and Mexico is helping to sustain a decent rate of growth for the emerging world as a whole.

A real revolution is underway in Japan but this will do little to stimulate global growth in the immediate future.

The central bank’s new governor was chosen for his resolution to make monetary policy as stimulative as possible. His 2% inflation target led to a particularly reflationary policy, based on substantial amounts of risky financial asset purchases and a marked depreciation of the yen. This aggressive policy is reflected in the aim of doubling the money supply within two years. Meanwhile, a number of markets are set to be deregulated, with tax incentives for investment now approved and the labour market’s inflexibility being tackled, while a fiscal stimulus package worth around EUR 100 billion is already being prepared.

However, the possibility of Japanese economic revival will first involve a depreciation of the yen (already 25% against the dollar and 30% against the euro since the announcement of early elections) and parallel productivity gains. Stronger Japanese growth will therefore come at the expense of rival exporters, not just in Asia but also in Germany. This sharp competitive devaluation may exert fresh deflationary pressures, adding to those resulting from deleveraging in developed countries.

Ben Bernanke’s Federal Reserve no longer has to prove its determination to support US growth.

In the United States, debt paring began in 2008, competitiveness is high, unemployment is falling slowly but surely and companies have an abundance of cash to invest. Despite the absence of political agreement over the budget, measures aimed at reducing the fiscal deficit, involving an amount estimated at 0.3% of GDP in 2013, have been implemented while maintaining a sufficient level of growth – projected to be +1.9% in 2013!

In the short term, however, some developments are less encouraging. We think that significant one-off dividend payouts at the end of 2012, ahead of tax increases in 2013, swelled consumer spending artificially in the first quarter. We also view the fall in the savings rate (to 2.6% of GDP) as providing only a short-term boost to consumer spending.

This significant downside to our interpretation of the US economy shows the pressing need for all countries to offer a coordinated economic and monetary policy response to counter the recessionary effects of deleveraging. When the chairman of the US Federal Reserve invites his peers to follow the same unorthodox policy as the United States to boost world growth, he is being reassuringly realistic.

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