Kick the can down the road
The latest G20 meeting in Mexico fell under the radar because everybody was focused on the US Presidential elections taking place at the same time. That is why nobody noticed that policy makers have changed their stance, says the economist Martin Guri, head of Nordea's equity strategy team in Stockholm, during a conference at Nordea Luxembourg.
At the G20 meeting, which took place on November 5-6, policy makers said that their main focus in the period ahead will be to rebuild confidence, reduce risks and volatility in international financial markets, contribute to a faster pace of economic recovery and job creation, and promote the foundations for strong, sustainable, and balanced growth. Martin Guri underlines that the order was reversed, because previously the focus was on cutting deficits.
Mr Guri adds that the G20 also took the foot off the brakes: “In light of the weak pace of global growth, the advanced economies will ensure that the pace of fiscal consolidation is appropriate to support the recovery”, he said, citing the policy makers who met in Mexico. The Swedish economist thinks that this is a contradiction because you can’t have fiscal consolidation and recovery at the same time; you have to choose one or the other. But to him, this is an important shift in policy and it indirectly opens the door for more support.
“Policy makers are becoming softer. This means that Greece will continue to get the money the country needs and countries like Spain or France will never be put under pressure”. Martin Guri emphasises that this policy makes sense in the short term to boost economic recovery, but in the long run countries with substantial budget deficits and public debts have to be disciplined.
Nordea forecasts a growth rate of 3.3% for the world economy in 2013 and 4% for 2014, but because of the many uncertainties right now, “an economic outlook for 2014 is like predicting good weather for the summer of 2013”, as Martin Guri puts it, with an ironic tone. For the Eurozone, the Scandinavian bank predicts 0.4% in 2013 and 1.7% in 2014.
According to Martin Guri’s analysis, the economy gets no real support from better leading economic indicators in the short term; this is not so bad because investors, especially institutional ones, are looking at the summer of 2013 and beyond. “Everybody is reading the newspaper and knows what is going on today, but time heals a lot of wounds. From that perspective, we have noticed that investors have become more aggressive recently and that there is a chase of return with greed outweighing fear”.
Looking at the political agenda for the twelve months to come, there are elections in Japan on December 16, which are not being given much attention, Martin Guri notes. In Japan, policy makers want to raise the inflation target from the current 1% to 2%; “this can only be done with a weaker currency”, the economist highlights. In China, the new leadership will change in March 2013; it is not only the seven men who were elected in November, but also about a thousand new local decision makers.
In Iran, a new president will be elected in June. “The situation is quite messy right now in Iran. The country will focus on its perpetual enemy Israel. According to Marti Guri, the German elections will represent the political highlight of the year 2013. He expects extreme media hype and predicts at the same time that Angela Merkel will calm things down: “she is so good at that”, he concludes. CW