Global Economy in 2012 - Pivotal Year, Pivotal Challenges
Business Monitor International, January 2012, Pages: 57
Our Themes For 2012 In many ways, our 2012 preview is a continuation of our 2011 outlook. At the end of 2010 we believed the upcoming year would be characterized by heightened political risk, a Chinese economic slowdown, and a culmination of the eurozone crisis. As it turns out, there remains much unfinished business. We expect 2012 to offer answers to some of the big questions, such as whether the Chinese growth model is doomed, and whether Europe can finally get its act together. Our growth forecasts are below-consensus, but not dramatically so.
However, we are very concerned about the negative tail risks, with a deflationary scenario potentially arising from a combination of deleveraging and a reduction in global demand. No matter how we look at it, 2012 looks set to be as interesting – and as challenging – as 2011. 2012: The Year Of Political Risk (Redux) As we had expected, 2011 was among the most politically tumultuous years in a generation, with revolutions and public unrest reminiscent of the fall of the Berlin Wall and end of the Soviet Union two decades ago. The year 2012 promises to be another landmark year for political risk. The two biggest shocks of 2011 – the ‘Arab Spring’ and the eurozone crisis – remain unresolved, and we expect the fall-out from these two events to persist well into 2012. In fact, the outcomes of the ‘Arab Spring’ and eurozone crises will shape their respective regions for at least a generation. In addition, several politically or economically significant countries will hold general elections, which could result in changes of government, and thus policy.
These include (in chronological order) Taiwan, Russia, Iran, France, Mexico, Venezuela, Ukraine, the United States, South Africa, and South Korea. Meanwhile, China will begin a five-yearly leadership transition in the autumn, which will continue into 2013. As regards risks stemming from international conflicts, we see a rising possibility of external intervention in Syria, growing tensions between the US and Israel vis-à-vis Iran over the latter's nuclear programme, and greater strains between Russia and the West over a host of security issues. The death of Kim Jong-Il also raises serious questions about the future of North Korea. China: From Miracle To Meltdown 2012 may be the year in which China’s economy goes from – as the title of our China Special Report in October put it – ‘Miracle To Meltdown’. We have warned for years about the imbalances inherent in the Chinese economic growth model, which are characterized by a major overemphasis on investment at the expense of consumption, underpinned by unsustainable credit expansion. Now, several indicators point to a Chinese hard landing.
While the definition of hard landing is up for debate, we generally consider it to include the following characteristics: a contraction in manufacturing output as reported by the PMI surveys; a contraction in services sector PMI; a sustained fall in imports; doubledigit house price declines; elevated banking sector stress; and growing expectations of currency weakness. Each of these boxes was being ticked as 2011 made way for 2012, which is why, despite our 7.5% growth forecast for the year, the economic situation underneath the surface could be far worse than many are anticipating. Needless to say, a Chinese hard landing would be a crushing blow to countries hoping that China can – as it did in 2008-09 – sustain global demand in the face of a developed world downturn.
Introduction
Our Themes For 2012
2012: The Year Of Political Risk (Redux)
China: From Miracle To Meltdown
CHART Credit Boom To Bust?
CHART No ResolutionYet
Finally, A Eurozone Solution
Washington Gridlock
Imbalances And Deflation
Easing, Easing, Easing
CHART Imbalances Persist
CHART Easy Money
CHART Banks’ Pain Is Not Over
Credit Crunch
Global Assumptions
Growth Prospects Dim As 2012 Begins
TA BLE: GLOBAL ASSUMPTIONS
Developed States
Emerging Markets
TA BLE: GLOBAL & REGIONAL REAL GDP GRO WTH, % CHG Y-O-Y
Table: DEVELO PED STATES , REAL GDP GRO WTH FORECAST
BMI AND BLOOM BERG CONSENSUS GDP FORECASTS
EMERGING MARKETS AGGREGATE GRO WTH
Asia Outlook
Key Regional Macro/Market Views For 2012
Key Macro Themes For 2012:
CHART Warning Signals
Core Financial Market Views
1) Bearish AUD
2) Bearish Macau Casinos
CHART Mean Reversion
CHART Australia - Echange Rate US$/AUD
3) Bearish China 12-Month NDF
CHART House Of Cards
CHART Technically And Fundamentally Due A Correction?
12-Month CNY NDF
4) Bullish Indian Vs Indonesian 10-Year Government Bond
5) Short JCI, Long MSCI EM Asia
6) Short Hang Seng Financials Vs Asia Financials
CHART Reversal Due
CHART An Expensive Market
7) Long INR Vs Asia Basket
Playing The Tail Risks
Bullish Shanghai Composite Is A Cheap Call Option On Another Stimulus
CHART Further Downside Ahead
CHART INR Underperformance Overdone
Taiwan Taiex And Singapore Straits Times To Outperform On A Global Recovery
Japan Bond Fiscal Crisis Is The Major Downside Risk
CHART All Eyes On Beijing
CHART Attractive Yields For Straits Times And Taiex
CHART Land of The Rising Debt
Europe Outlook
Business Monitor International Ltd
special report
Six Key Themes For 2012
Emerging Europe Regional Real GDP Growth Rate (%)
1 Falling Demand In The West
2 Mineral Wealth No Longer A Silver Lining
CHART Eurozone Manufacturing In Decline
CHART CEE Highly Exposed To Eurozone Slowdown
3 Tighter Credit Conditions Increase Crisis Risks
CHART China’s Sandbox?
CHART At The Mercy Of Austrian And Italian Banks
CHART Highly Dependent On Foreign Lending
4 Capital Flight To Remain A Key Challenge For Policymakers
5 A Hard Landing In Turkey
CHART All Eggs In One Basket
CHART More Easing Ahead, But Capital Flight A Key Concern
6 Policy Risks To Intensify Further
CHART Current Account Gap Keeps Widening
Americas Outlook
Key Macro Themes For 2012
Turkey - 12-Months Rolling Current Account Balance
Core Themes
The Risks
1 Ammunition To Support Growth, And Willingness To Use It
CHART More Government Than Ever Before
CHART Where Is The Investment Going?
2 Strong Fixed Investment
3 Political Stability, But Watch For Contagion From Argentina And Venezuela
4 Violence In Central America And Caribbean To Persist
Risks Are HighAnd Growing
1 The Credit Taps Run Dry
2 Commodity Price Collapse
CHART Assessing China’s Potential Impact
MENA Outlook
Key Macro Themes For 2012
China - Imports Of Selected Metals As % Of Global Imports (2010)
CHART Oil Exporters Outperforming
CHART Downside Pressures Mounting
CHART Increased Spending Has Its Drawbacks
CHART Policy Uncertainty Weighs On Outlook
Sub-Saharan Africa Outlook
2012 Macro Preview: Five Key Themes
1 Weak External Demand: US Stagnates, Eurozone Stumbles On
SSA –Export Data
2 China Slowdown
3 Divergent Inflation And Interest Rate Trends
CHART Assessing China’s Potential Impact
CHART A Mixed Picture
4 Speculation On The CFA Franc
5 Rebased GDP In Nigeria
SUB-SAHARA N AFRICA –POLICY INTEREST RATES
SUB-SAHARA N AFRICA –REAL GDP GRO WTH, %
Global Political Outlook
Landmark Political Events Looming In 2012
Global Flashpoints: Eurozone, Syria, Iran, Afghanistan, Korean Peninsula
4 Business Monitor International Ltd
2012: PIVOTAL YEAR, PIVOTAL CHALLENGES
ELECTION TIMETA BLE
United States: All Eyes On The Presidential Election
Russia: The 'Return' Of Putin
Russia And The West To See Increased Tensions In 2012
China's Leadership Transition
Wild Cards To Watch
Commodities
2 No Return To 2009 Lows
CHART Volatile Range Trade Ahead
CHART Gold To Stay Ahead
CHART 7% Is The New 10%
CHART Still Medium-Term Bullish Gold
3 China Hard Landing
4 Gold To Outperform
5 Continued Food Price Disinflation
6 Supply Risks To The Fore
7 Risks Aplenty
CHART Food Disinflation
CHART Watch Out For Tightness
Sector Focus
Global Infrastructure View
Themes And Trends In Infrastructure For 2012
Project Finance 2012 Outlook
Divestments Over Capex
CHART Fundraising Struggles To Recover In Spite Of Numerous New Funds
Political Risk Guides Forecasts
CHART Miss Year For Infrastructure Equities
CHART Public Funding Constraints Limit Growth Potential
CHART 12th Five Year Plan And Sporting Tournaments Fuel Growth
Oil Market Outlook
Global Oil Supply And Demand Outlook
OPEC Supply
LIBYA PRODUCTIO N UPDATE : MAIN FIELDS (As of Jan 9)
CHART Climbing Back
GLOBAL OIL CONSUMPTION
GLOBAL OIL PRODUCTIO N
Short Term Demand Outlook
Short-term Supply Outlook
Long-Term Supply And Demand
Agribusiness Outlook
Key Agribusiness Themes For 2012
1 Ethanol Supply To Tighten
CHART No Collapse On The Cards
2 Elevated Risk Of Supply Shocks
3 Food Producers' Outperformance To Resume
4 Risks To Commodities Trade Finance
CHART More Upside Risks To Ethanol Prices?
CHART Russian Export Ban Ignites Wheat Prices
5 China's Wild Card
CHART Short-Term Underperformance: The Anomaly
CHART Imports Surge When Spread Narrows
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