The world did not come to an end on December 21. Even the European Union has survived its sovereign crisis without breaking up. Though all eyes are on the US finding a way to deal with its “fiscal cliff”, by and large economists are betting on a much better 2013. The New Year is expected to see a revival in global growth. UBS Investment Research expects real global gross domestic product (GDP) growth to climb to three per cent in 2013 and 3.4 per cent in 2014, from 2.7 per cent in 2012.
And, this revival in global growth will partly be driven by a revival in the US economy, as its private sector is becoming more competitive, after a protracted period of crisis. With both individual and private sector deleveraging nearly complete, the economy is ready for growth. Many expect the US to recover ahead of its peers in 2013. Capital flows are expected to move back to the US, as investments pick up. One of the other themes that is likely to gain momentum in the US is near-shoring, with companies like Apple, General Motors and General Electric (GE) looking at creating more jobs at home by building more manufacturing facilities at home. GE added 10,000 jobs in 2011 and Apple, for the first time since the 1990s, will manufacture Macs in the US.
Another big trend that is expected to dominate in 2013 is the end of crude oil’s super cycle. Over the last few years, oil prices have raced ahead, hurting oil thirsty economies like India. However, the boom in shale oil and gas production in the US could change the world’s energy equation as it is expected to become the largest producer of the commodity by 2017. This will keep oil prices capped at current levels, even as a sharp fall in oil prices (below $100/bbl) is unlikely.
With global growth reviving and commodity prices staying stable, emerging economies are expected to stage some recovery, too. However, Deutsche Bank Research says: “Until politically difficult reforms are enacted, emerging market equities will continue to under-perform.” Though Indian equities have outperformed other BRIC economies, further outperformance would require reforms that would revive investments.
So, where are the risks going to emanate from? Interestingly, few expect the Euro zone to blow up or disintegrate just yet. Economists believe macro adjustments are underway which would facilitate growth to return in the second half of 2013. However, natural disasters and geo-political risks could pose bigger threats to the world economic order than a sovereign crisis. Civil unrest in West Asia and regional tensions between Japan and China are the wildcards. Also, Deutsche Bank says that insured losses have mounted eight-fold since the 1980s, as freak weather events are occurring more often than can be explained by natural variability alone.
