The start of 2013 has brought with it a sense of cautious optimism that the tide may be turning for the better for the global economy. Robert Prior-Wandesforde, head of economics research for Southeast Asia and India, Credit Suisse, while sharing his views with Puneet Wadhwa suggests that he expects the euro area to turn from recession to modest recovery. The equity markets will remain sizeable and probably even stronger than in 2012, he adds. Edited excerpts:
How do you see 2013 panning out for the troubled Euro zone and the US? Is a recovery in sight?
We think the most likely path of the global economy is a modest 0.3-percentage-point acceleration in real growth to about 3.4 per cent in 2013. Europe’s circumstances may not be good, but they look much better than they did only a few months ago. Considerable fiscal austerity having already been implemented and the fiscal drag in 2013 is expected to be less intense than in 2012. We expect the euro area to turn from recession to modest recovery as fiscal drag lessens and financial conditions loosen. This will relieve some of the pressures on places like the UK and Eastern Europe that have deep trading links with the euro area. The US is in a different cyclical and policy situation. Just as the consumer side of the economy has perked up – in growth rate terms, levels of activity are still fairly subdued – the business sector of the economy has fallen into a new funk. Exports have been hampered by the global environment as have the profits of major American-based multinational corporations. Capex has weakened after leading the economy in the early recovery phase of 2010 and 2011. We expect the effect of the US fiscal shock to be more visible in the first and second quarters of the year, and then fade somewhat in the second half as higher taxes and reduced government outlays become baselines for sequential calculations.
What about emerging markets (EMs)?
On a full-year basis, we expect the EM economies to expand 5.2 per cent in 2013, up from an estimated 4.7 per cent growth rate this year. Our current 2013 EM growth forecast is about two-tenths lower than the September estimate, largely reflecting downward revisions in Eastern Europe, the Middle East and Africa and broadly stable estimates for both non-Japan Asia and Latin America.
Have markets priced in too much good news as regards India?
This time last year we argued, purely on the basis of our forecasts for the key macroeconomic fundamentals that the Indian equity market would rise strongly, outperforming other Asian markets, while the rupee and Indian local-currency government bond market would also rally. Our optimism did not reflect a change of view regarding India’s structural fundamentals, which we have consistently viewed as poor, but rather what we saw as a cyclical/tactical opportunity in the context of the huge pessimism pervading the country at the time.
If our forecasts are correct, we can look forward to a further rally in local currency sovereign bonds, with the 10-year yield likely to fall at least as low as 7.5 per cent by mid-year, also helped by the diminishing prospect of a near-term ratings downgrade. Although we find it hard to be structurally positive about the currency, the cyclical sweet spot we anticipate could see a short-lived rally, most likely in the March quarter of 2013.
Is the worst behind us as regards the macros?
We believe the drop in market interest rates, the diminishing lagged effects of higher policy rates, the weaker rupee and the confidence-boosting effects of the government’s reforms mean economic growth has bottomed. Although this is a negative for the external deficit, our quantitative analysis suggests the current account deficit will still shrink in 2013. Stronger economic growth bodes well for a lower fiscal deficit, while the government could also surprise many with a tighter-than-expected February budget.
How long will this optimism last given the position of the current account deficit amid sticky inflation and Reserve Bank of India’s (RBI) stand on interest rates? Aren’t we being too optimistic here?
In our view, the economy has now bottomed and will see at least a moderate recovery over the course of 2013. We see three reasons for cautious optimism.
Firstly, the weaker rupee should boost net exports. Although real import growth apparently exceeded real export growth in the September quarter (after two consecutive quarters of positive net export growth), this is likely to represent an aberration.
Secondly, we are confident that the government’s reforms will provide a quick boost to business confidence, encouraging some companies to increase capital spending. Lastly, the RBI may have been slow to cut the repo rate, but market interest rates, including the three-month interbank and one-year commercial paper rates, have fallen by at least one percentage point over the last year. This, together with the diminishing lagged effects of the previous rate rises, should support investment and durables consumption in an economy we believe to be more interest rate sensitive than is generally considered to be the case.
So, what does all this mean for the fund flows (FII flows) into India as compared to the EMs? Do you expect 2013 to be better than the previous year for the Indian and global equity markets?
We expect fund flows into both the government bond and, more importantly, the equity market to remain sizeable – probably even stronger than in 2012.
