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Deloitte global-economic-outlook-2013-q1 lowres

  1. 1. GlobalEconomicOutlook1st Quarter 2013
  2. 2. Global Economic Outlook Q1 2013 Ira Kalish, Deloitte Research in the United States, Deloitte Services LP 2 012 was, if nothing else, a year of pronounced economic uncertainty for many countries around the world, and for most of them, this trend will linger into 2013. In Europe, a fiscal crisis continues to kindle doubt about the survival of the euro, creating uncertainty that is casting a shadow on real economic performance in the new year. The United States may have already entered recessionary territory. Likewise, China, India, and Japan are treading uncertain economic waters and scrambling to establish or maintain economic growth. This first-quarter edition of the Global Economic Outlook begins with Alexander Börsch’s assess- ment of the Eurozone, where uncertainty remains a recurring theme. Concerns about the future of the shared currency are giving way to worries about the real economy, which may take their toll on growth prospects in the coming year. Next, Carl Steidtmann suggests that the United States, like Europe, is already in a recession. He offers his rationale for a negative GDP forecast that may pull the United States into recessionary ter- ritory in early 2013. He suggests that the depth and duration of this recession will differ according to the speed of the resolution. My assessment of China’s economic outlook is comparatively optimistic. Chinese economic growth is accelerating after slowing down for most of 2012. Improving exports, industrial produc- tion, retail sales growth, and declining consumer price inflation suggest that China is, in fact, on the mend. However, the country will need to navigate significant challenges, including ebbing foreign direct investment, a transition in political leadership, and the country’s ongoing need to shift away2
  3. 3. Preface Global Economic Outlook published quarterly by Deloitte Research Editor-in-chief Ira Kalish Managing editor Ryan Alvanos Contributors Pralhad Burli Alexander Börschfrom export-led growth in favor of its consumer-driven counterpart, all of which Carl Steidtmannraise questions about China’s ability to stay its course. Ian Stewart Next, my outlook for Japan, entitled “Back into Recession,” suggests that Editorial addressJapan did not end 2012 on the optimistic note it enjoyed a year ago. The country’s 350 South Grand Streetexports have been hampered by a recession in Europe, declining automobile sales, Los Angeles, CA 90013waning government spending, aggressive monetary policy that hasn’t offset the Tel: +1 213 688 4765country’s formidable deflationary pressures, and a high-valued yen that continues ikalish@deloitte.comto compromise the competitiveness of Japanese exports. Finally, Pralhad Burli writes that growth in India may improve over the nexttwo quarters after experiencing a period of deceleration. Economic challenges, including a bur-geoning fiscal deficit, low investments, elevated inflation, and high interest rates are looming overIndia’s outlook.Dr. Ira KalishDirector of Global EconomicsDeloitte Research 3
  4. 4. Contents 6 Geographies Eurozone: Greater Trust and Greater Uncertainty | 6 Concerns about the future of the euro are giving way to uncertainty pertaining to the region’s economic health. United States: Peering Over the Fiscal Cliff and Into 12 the Weeds | 12 Negative GDP growth in the fourth quarter and the likely outcomes of the fiscal cliff suggest that the US economy will find itself in recession- ary territory in early 2013. China: Turning the Corner? | 20 Economic growth is accelerating in China after slowing down for most of 2012. However, the country will need to navigate significant chal- 20 lenges in order to stay its course. Japan: Back into Recession | 24 Japanese exports have been hampered by a recession in Europe, declining automobile sales, waning government spending, aggressive monetary policy that hasn’t offset the country’s formidable deflation- ary pressures, and a high-valued yen that continues to compromise the competitiveness of its exports. 24 India: Cautious Optimism Part Deux | 28 Growth in India may improve over the next two quarters after experi- encing a period of deceleration. However, a burgeoning fiscal deficit, low investments, elevated inflation, and high interest rates are looming over India’s outlook. 284
  5. 5. Appendix 30 Charts and Tables | 32 GDP growth rates, inflation rates, major currencies vs. the US dollar, yield curves, composite median GDP forecasts, composite median cur- rency forecasts, OECD composite leading indicators 36 38 42 5
  6. 6. EUROZONE Dr. Alexander Börsch is head of research, Deloitte Germany Eurozone: Greater Trust and Greater Uncertainty by Dr. Alexander BÖrsch 2 012 was considered the decisive year for the survival of the Eurozone. It became the year of the European Central Bank. The ECB remains at almost unprecedented levels, but its roots are changing. While uncertainty about the future of the euro itself dominated the came to the rescue of the euro each time it was European economy in 2012, uncertainty about seriously endangered. This relief came either in the growth outlook clouds the economic pros- the form of flooding the markets with liquid- pects for Europe for 2013 and beyond. ity—the long-term financing operations—or in the form of guarantees for the survival of the The growing trust in euro such as Mario Draghi’s “whatever it takes” announcement.1 the euro itself … While the ECB successfully increased trust Although risks have not entirely disap- in the future of the euro itself, the key chal- peared, the ECB’s announcement of guar- lenge for the Eurozone pertains to reducing anteeing the existence of the euro was a uncertainty. Uncertainty in the Eurozone game-changer that built trust among investors. 6
  7. 7. Eurozone Geographies 7
  8. 8. Global Economic Outlook: 1st Quarter 2013 The difference the announcement made is vis- financial markets but also in the real economy. ible in the results of Deloitte Germany’s CFO The possibility of a breakup of the Eurozone, survey,2 which was undertaken in April and for example, is one of the previously unthink- October, before and after the ECB announce- able tail risks. In other words, the range of ment (see figure 1). possible futures has increased massively. While there is still a sizable portion of Contrary to the financial crisis, which came German CFOs who think that the Eurozone as a complete surprise for most people, today’s will shrink within the next five years, there is uncertainties are known, but it is largely a clear trend: Considerably more CFOs think impossible to estimate their probability. The that the Eurozone will have the same members result is much greater uncertainty about the in five years’ time. And even more importantly, future state of the economy. the number of CFOs who assume a large-scale Despite greater trust in the future exis- disintegration of the Eurozone shrank substan- tence of the euro—the core component of tially; only 3 percent consider this the most uncertainty in Europe over the last three likely scenario. This indicates that the funda- years—overall uncertainty in Europe remained mental doubts about the future of the euro high throughout 2012. Figure 2 displays an are receding. uncertainty indicator that combines economic forecasts with content analysis of leading … is not matched by decreasing newspapers to arrive at a measurable concept of uncertainty. It shows that despite the ECB’s uncertainty in Europe action, uncertainty in Europe is still at an In the wake of the financial crisis, the exceptionally high level. The uncertainty peak economic environment has changed drasti- was reached shortly before the ECB started cally. The main change concerns much higher its long-term refinancing operations at the volatility and greater tail risks, not only in the end of 2011, but it still stands at a level that8
  9. 9. Eurozone Geographiesis similar to the peak of the financial crisis in sectors, firms tend to postpone investment,2008—2009. hiring, and project decisions. They tend to wait This is confirmed by other indicators. for less uncertain times to make importantDeloitte Germany’s CFO Survey suggests decisions that are potentially hard to reverse.that the level of uncertainty that German The same is true for consumers who arecompanies feel they are exposed to has actu- hesitant to make bigger purchases, especiallyally increased between the second and fourth durable goods. Thus, uncertainty generates aquarters (see figure 3).3 wait-and-see attitude in the economy, with all This is paradoxical, given the greater con- ensuing negative consequences.fidence in the euro. The roots of uncertaintymust have changed; worries about the real The growth outlookeconomy have joined worries about the euro. for the EurozoneAmong the top three risk factors the German Ongoing uncertainty will continue to beCFOs cited in the survey, sinking domestic and a drag on the Eurozone’s growth in 2013.foreign demand came immediately after the While the fundamentals in the crisis countries,risk of instability in the financial system. The such as unit labor costs and current accountremaining risks stemming from the euro crisis balances are beginning to improve,5 growthand the growing fears of recession thus create a in 2012 was weak. At the time of writing innew uncertainty cocktail.The effects ofuncertainty While uncertainty is aprincipal ingredient of thebusiness environment, anoverdose of it is damagingin macroeconomic as wellas microeconomic terms.Uncertainty has becomethe main drag on eco-nomic growth in Europeand elsewhere. TheInternational MonetaryFund (IMF) has foundthat economic growth isstrongly negatively correlated with uncertainty. December 2012, production in the EurozoneRecessions associated with uncertainty are gen- has been shrinking since autumn 2012, theerally more severe than normal recessions, and Eurozone’s GDP is on the level of 2006, andthey tend to be deeper and longer. The output unemployment has reached a record level.losses in such recessions are nearly twice as The Eurozone’s GDP shrank in 2012 byhigh as those resulting from other recessions.4 0.4 percent (see figure 4). The fastest-growing The main reason for these negative effects countries (Germany and Austria) reachedis obvious. While the impact differs between 0.9 percent, while the crisis countries shrank 9
  10. 10. Global Economic Outlook: 1st Quarter 2013 between 1.5 percent (Spain) and 6 percent confidence in the reforms of the crisis coun- (Greece). Currently, there are some posi- tries or reforms of the Eurozone’s governance tive signs from early indicators. While the structure—growth could be considerably economic sentiment index continues to be higher. Unfortunately, the reverse is also true. negative overall, it rose in November. Increases could be registered for industry and retail Which growth policy for Europe? trade. The increase in economic sentiment in The key challenge for the Eurozone in the EU as a whole was even stronger. 2013—finding a way to grow and consolidate These are positive signs, but the case for budgets at the same time—remains largely strong growth in 2013 is weak. The most likely unchanged. Traditional Keynesian recipes and scenario for the Eurozone is a stabilization of the insights of modern growth theory target production in the first half of 2013, followed completely different levels in that regard. The by a slow and sluggish recovery.6 For the whole Keynesians assume that higher public spend- year 2013, the Eurozone is likely to achieve a ing, financed with higher debt, will jump- growth rate hardly above zero (0.2 percent), start the economy in the short run thanks to and the Eurozone’s crisis countries will still multiplier effects. Growth theory argues that have negative growth even if it is expected to sustainable growth is a supply-side matter be less negative than in 2012. and is fostered by investments in innovation The scenario of stabilization and a fol- and the infrastructure that supports it, such as lowing recovery is based on the assumption education and R&D. that uncertainty will slowly decrease. The Public investments in growth-enhancing key variable for all current growth predic- areas can be instrumental to bridge this ten- tions is, in fact, uncertainty. Most upside and sion and contribute to higher growth and downside risks are associated with it. If the higher growth potential. While they gener- Eurozone manages to decrease uncertainty in ate demand and stabilize the economy, they the markets—whether through greater investor also contribute to a higher growth potential.10
  11. 11. Eurozone GeographiesInvestments in higher education and training, toward growth should therefore be the naturalas well as in R&D, have positive short- and complement and part of structural reforms.long-term effects. Only in this way could the euro crisis have a Investing in the levers of growth and positive effect; namely, it could help build theredesigning public investments and budgets foundations of stronger growth.1. On July 26 2012, the president of the European Central Bank announced that; “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” This suggested that the ECB is ready to buy government bonds of the crisis countries to lower their yields2. Deloitte & Touche GmbH Wirtschaftsprüfungsgesellschaft “Controlled Defensive.” CFO Survey Germany 2/2012.3. Deloitte & Touche GmbH Wirtschaftsprüfungsgesellschaft “Controlled Defensive.” CFO Survey Germany 2/2012.4. International Monetary Fund. “Coping with High Debt and Sluggish Growth.” World Economic Outlook October 2012.5. See Deloitte Global Economic Outlook 4th Quarter 2012.6. German Economic Research Institute. Joint Economic Forecast Autumn 2012 11
  12. 12. USA Dr. Carl Steidtmann is chief economist at Deloitte Research, Deloitte Services LP United States: Peering Over the Fiscal Cliff and Into the Weeds by Dr. Carl Steidtmann A s 2013 begins, the issue of the moment is Table 1: Contributions to GDP growth by segment the next stage in the fiscal policy negotia- tions, especially the issue of raising the debt Real GDP 2.70% ceiling. But regardless of what happens with Consumer spending 0.99 % the fiscal cliff, the United States is already in a recession. The outcome of the remaining bud- Business investment -0.23 % get negotiations will determine whether it will Business inventories 1.16 % be a mild recession or something more serious. Let’s start this recession by looking at the Farm inventories -0.39 % composition of Q3 GDP (see table 1). It is the Housing 0.32 % mix of growth in that quarter coupled with the consequences of the fiscal cliff that puts the US Trade 0.14 % economy at risk for another recession. Federal government 0.71 % State government -0.04 % Source: US Bureau of Economic Analysis 12
  13. 13. United States Geographies 13
  14. 14. Global Economic Outlook: 1st Quarter 2013 Consumer spending 1), largely due to falling energy prices due to Consumer spending grew 1.4 percent in Q3 mild weather. Since May, incomes are down and made up 0.99 percent of the 2.7 percent slightly despite very modest employment growth in Q3 GDP. growth (737,000 jobs, 0.55 percent). Since The October consumer spending data June, the savings rate has fallen 0.7 percent to showed a 0.3 percent decline in real consumer 3.4 percent. spending. If the impact of Hurricane Sandy is The number-one factor driving down anything like that of Katrina, there could be a income growth is a decline in real hourly similar decline in the November figures. That, wages. Real hourly wages for non-supervisory in turn, will likely result in a decline in real workers peaked in August 2010 at $8.95 in real consumer spending in Q4. The fiscal cliff nego- 1982 inflation-adjusted dollars. Over the past tiations could also have a negative impact on two and half years, real wages have declined spending. Consumer confidence has already modestly, dropping by just over 3 percent (see fallen sharply, as it did in the summer of 2011 figure 2). The beginning of the decline coin- during the last debt ceiling debate. With 70 cides with the initiation of the second round percent of GDP coming from consumer spend- of quantitative easing by the Federal Reserve. ing, that raises the risk that Q4 GDP could During that time, gasoline prices rose by 36.2 be negative. percent, while food prices were up a more Real disposable incomes (incomes after modest 7.1 percent. taxes and adjusted for inflation) posted mod- The tax agreement signed at the start of est growth at the start of the year (see figure the year will drag down income growth even14
  15. 15. United States Geographiesfurther. The end of the Social Security taxholiday will cost $95 billion. That will shaveanother 0.8 percent of disposable income. Theincreased taxes on upper-income householdswill also remove some spending. With no income growth, it’sgoing to be hard to sustain spend-ing growth into the new year in theface of tax increases that will furtherreduce real disposable income.Housing There were significant downwardrevisions in the new home sales datapublished in October. The numbersshow a flattening out of new homesales that began in February, withsales turning downward in May (seefigure 3). With a pickup in buildingactivity, there is a risk that invento-ries of new homes are greater thanthe demand, potentially resultingin a pullback in building next year.New home completions includehomes built for rental purposesand owner-built units that are notincluded in new home sales, and assuch, will always be greater than newhome sales. 15
  16. 16. Global Economic Outlook: 1st Quarter 2013 The weakness in home sales will undermine Chief Executive magazine, CEO confidence home construction going forward. What has fell 2.3 percent in November and has been been a modest positive for the economy will go down in five of the past six months.1 The back to being neutral or slightly negative. magazine’s CEO confidence index fell from 5.11 in October to 4.99 in December. CEOs Business investment cited uncertainty over the fiscal cliff, tax Business investment fell in the third policy, and regulatory change as the reasons quarter. New orders for non-defense capital for their growing pessimism. At the small- goods less aircraft orders, a proxy for future business level, future expectations of small capital goods spending, rose 1.7 percent in business owners plummeted from +2 in October, but are still down 8.1 percent from October to -35 in November, according to a a year ago and have declined in seven of the survey conducted by the National Federation past 12 months (see figure 4). New orders for of Independent Businesses (a rating above zero computers fell 9.3 percent in October and are is a sign of optimism).2 The collapse in future down 25.7 percent from a year ago. Given the expectations for small businesses was due to declines in new orders, business investment is uncertainty over the fiscal cliff coupled with going to remain negative for several quarters worries about escalating health care costs and to come. a tsunami of new financial, health care, and Business investment is being hurt by a energy regulations. decline in CEO confidence. As measured by16
  17. 17. United States GeographiesInventories mid-December. The weakness in the Baltic In an era of just-in-time inventory man- Dry Index was reflected in the US trade dataagement, no increase in inventories in excess for October. US exports of goods and servicesof sales is ever wanted or warranted. When fell 3.6 percent in October, the largest month-it happens, it is quickly reversed. Non-farm to-month decline since January 2009. Theinventories rose sharply in Q3, accounting for economic problems in both Europe and Japan1.16 percent of the 2.7 percent increase in GDP are beginning to take a toll on US exporters.growth. In drawing down inventories in Q4, Imports were also down, although not by asreal GDP growth will give back some of the much. The net result was a $2 billion month-Q3 growth. to-month increase in the trade deficit. Unless reversed in November and December, whichTrade seems unlikely given the fall in the Baltic Dry Global trade is slowing. The Baltic Dry Index, the decline in exports and the rise in theIndex, a proxy for global trade, peaked trade deficit will reduce Q4 late October at 1109 and fell to 826 in Table 2: Projected contributions to Q4 GDP Real GDP -1.05 % Consumer spending 0.00 % Business investment -0.23 % Business inventories -0.58 % Farm inventories 0.00 % Housing 0.16 % Trade 0.00 % Federal government -0.36 % State government -0.04 % Source: US Bureau of Economic Analysis 17
  18. 18. Global Economic Outlook: 1st Quarter 2013 Q4 GDP: The start of a recession • The pace of housing investment is halved by rising inventories and the impact of Sandy. Putting these different developments together, one can roll up an estimate for Q4 • Trade makes no contribution to GDP in the GDP. What the confluence of factors add up fourth quarter. to—Sandy, the fiscal cliff, the weakness in global trade, and the givebacks from one-time • Half of the surge in government spending is developments that boosted Q3 growth—is a reversed, taking 0.36 percent off of GDP. negative forecast for Q4 GDP. The projection for a negative fourth quarter • State and local government spending uses the following assumptions: continues to contract as it did in the • Consumer spending is flat on the quarter third quarter. due to uncertainty over the fiscal cliff and The result: Q4 real GDP contracts by a little the impact of Sandy. more than 1 percent. • Business investment continues to decline as it did in Q3 due to fiscal cliff worries Conclusion and weakness in European demand, taking Higher taxes and less government spend- -0.23 percent off of GDP. ing next year are likely. A recession seems likely, albeit the depth and duration of the • Half of the build-up in business inventories recession will differ depending on the speed of is reversed, taking -0.58 percent off of GDP. the resolution. 1. “CEO Evaluations of Current and Expected Future Business Conditions Even-Out at a Middle Mark.” Chief December 18, 2012. ceo-evaluations-of-current-and-expected-future-business-conditions-even-out-at-a-middle-mark 2. “December Report: Small-Business Owner Confidence Plunges More than Five Points One of the lowest optimism readings in survey history” National Federation of Independent Business. Accessed January 4, 2013
  19. 19. United States Geographies 19
  20. 20. CHINA China: Turning the Corner? by Dr. Ira Kalish A fter slowing substantially over the past year, China’s economy is showing signs of reverting to faster growth. A rise in govern- ment-funded investment has helped to offset the considerable weakness in China’s exports to Europe. Interestingly, exports to other geog- raphies have actually improved. In October, overall exports were up 11 percent from a year earlier, far better than had been expected. This, in turn, contributed to a 9.6 percent increase in industrial production in October, offering the prospect of stronger GDP growth in the fourth quarter. In November, a private sector purchas- ing manager’s index for manufacturing moved into positive territory for the first time since July, indicating the fastest rate of growth in the sector in more than a year. Retail sales growth also accelerated in October, suggesting that the consumer sector is improving as well. Thus, it appears that China is on the mend. 20
  21. 21. China Geographies 21
  22. 22. Global Economic Outlook: 1st Quarter 2013 Moreover, consumer price inflation in Challenges for a new leadership China has decelerated substantially, with prices There has been a transition in China’s up a mere 1.7 percent in October versus a year political leadership, raising questions about the earlier. Indeed, this was the lowest rate of infla- likely path of government policy and the new tion in 33 months. This means that the central leadership’s approach to tackling longer-term bank has considerable wiggle room should economic challenges. Interestingly, outgoing it choose to further ease monetary policy in Chinese president Hu Jintao recently said that order to stimulate the economy. China should plan to double per-capita GDP However, although growth is showing signs from 2010 to 2020; this goal may be realistic if of revival, China still faces some challenges. Chinese economic growth doesn’t slow down. For example, foreign direct investment (FDI) This will likely require significant reforms into China declined in October for the 11th aimed at maintaining long-term growth in the time in the last 12 months. Slowing growth, face of challenging demographics. Hu hinted global economic weak- at such reforms by call- ness, a rising currency, ing for the private sector rising wages, and politi- For the private to have “equal access to cal uncertainty are all factors of production.” likely reasons for the sector, “equal access” He also called for China deceleration of inbound to improve its ability to investment. For the to production innovate and for a boost first 10 months of 2012, in domestic demand. inbound FDI was down factors is significant. For the private sector, 3.5 percent from 2011. “equal access” to produc- Outbound investment tion factors is significant. from China, however, increased substantially. Today, state-run businesses enjoy favorable In the first 10 months of 2012, outbound FDI terms of credit, which often limit the amount was up 25.8 percent from 2011. This suggests of credit available to private-sector busi- that Chinese companies are actively searching nesses—especially smaller ones, which must for resources and new opportunities around pay very high interest rates in the informal the world. The higher value of China’s currency credit sector. Reformers want to free up market means that foreign assets are becoming rela- interest rates that are now set by the central tively cheaper. In addition, the recent weakness bank and to allow all borrowers to compete in commodity prices has probably made com- freely for credit. Hu’s evident support for this modity production resources cheaper as well. measure could presage considerable reform of22
  23. 23. China GeographiesChina’s credit markets. Yet doing so will likely imports from China rose only 4 percent overhave the effect of reducing the profit margins the last three years. Absent huge productivityof state-run businesses. gains, this pattern cannot be sustained indefi- Another issue is the need to shift away nitely because it would ultimately cause profitfrom export-led growth toward consumer-led margins to disappear. Rather, export growthgrowth. Rising wages are already helping to will likely decline, and provided wages con-make this happen. For example, in the past tinue to increase, consumer spending in Chinathree years, the wages of China’s migrant should grow faster. Market-opening reformsworkers increased by 56 percent. Yet export- could help accelerate this change in China’sers have mostly failed to pass on the increase economic their costs to customers; the prices of US 23
  24. 24. JAPAN Japan: Back into Recession by Ira Kalish The year 2012 began with moderately been seen as an important growth market. positive prospects for Japan. While other large Further, in Japan’s upcoming (December economies were expected to decelerate, Japan’s 2012) election, the opposition Liberal was expected to grow faster than in 2011 due Democratic Party (LDP) is expected to to massive reconstruction spending. And win—and LDP leader Shinto Abe has taken indeed, growth was reasonably good in the a more nationalistic stance on foreign first half of the year. Yet it now appears that policy issues than the current Japanese Japan fell into yet another recession during the leadership. This could have a further second half of the year. chilling effect on relations between Japan The current recession has several culprits: and China. • Japan’s exports have been hurt by the • Some of the economic strength Japan dis- recession in Europe, weakness in the played in the first half of the year was due to United States, and the slowdown in China. government incentives that support the sale In the third quarter of 2012, real exports of fuel-efficient automobiles. These incen- declined at an annualized rate of 22 percent. tives have now been eliminated, leading to a Moreover, the political dispute between deceleration in car sales. Japan and China over a group of islands claimed by both has poisoned the economic • Government investment spending in Japan relationship between the two countries. is weakening as the reconstruction bud- Sales of Japanese-branded products in get runs out, and no other forms of fiscal China have plummeted. Japanese auto economic stimulus are taking place. Thus, companies are now planning on a weak fiscal policy is not providing an impetus sales environment in a country that had for growth. 24
  25. 25. Japan Geographies 25
  26. 26. Global Economic Outlook: 1st Quarter 2013 • Although Japan’s monetary policy has of asset purchases, which was accelerated in become more aggressive, it has not been October. The BoJ set an explicit target of 1.0 successful in ending the country’s ruinous percent inflation. Yet deflation has continued, deflation. Declining prices mean that real so the monetary policy has yet to produce interest rates are relatively high. Plus, the the desired result. Political leaders are urging expectation that prices will decrease leads the BoJ to take a more aggressive stance and consumers to delay purchases. Indeed, purchase assets until inflation returns. Abe, the consumer confidence remains low, and leader of the LDP opposition party, is calling consumer spending is declining. for a target of 2 percent inflation and wants to require the BoJ to finance government stimulus • The value of the yen has remained relatively spending. In line with this view, Abe is calling high, thus hurting the competitiveness for the government to limit the BoJ’s indepen- of exports. dence. While such a measure is unlikely to pass A debate is raging about the future direc- in Parliament, the fact that politicians are so tion of Japan’s monetary policy. The Bank angry at the central bank could have an impact of Japan (BoJ) has implemented a program on policy in the future.26
  27. 27. Japan GeographiesOutlook Korean and Chinese competitors has damaged the brand equity of Japanese electronics com- The outlook for Japan is poor. Several fac- panies. On the other hand, Japanese companiestors are likely to inhibit a strong recovery. First, play a significant role in their supply chains.Europe is expected to remain in recession until Another challenge for Japan is the contin-at least the second half of 2013, which will ued strength of the yen. This strength puzzleshave a negative impact on Japanese exports. many observers, given that Japan has a mas-Second, the situation with China is not likely sive sovereign debt (in excess of 200 percent ofto improve any time GDP) and a weaken-soon. Third, Japan’s ing trade balance.current government The weakness in exports Under such circum-policy is not support- stances, a countryive of growth. (That has seriously damaged would normallysaid, the LDP has experience a weaken-indicated that it will the economic health of ing of its more fiscal Yet Japan’s debt is notstimulus spending if Japan’s corporate sector, seen as problematic,it wins the election. given the country’sHence, there is some especially export- high rate of savinguncertainty about the and very low interestdirection of policy.) oriented electronics and rates. Moreover, the The weakness in country’s economicexports has seriously automotive companies. stability, affluence, anddamaged the eco- low level of inflationnomic health of Japan’s create the impressioncorporate sector, especially export-oriented of safety. As such, investors in search of safeelectronics and automotive companies. For havens flock to Japan—even if the return onexample, a large private-sector employer their investment is quite low. This, in turn,in Japan says it faces significant losses. The boosts the value of the yen. Although thestruggles of Japan’s electronics companies stem loosening of monetary policy has helped tonot only from economic weakness, but from ease upward pressure on the yen, it has notcompetitive challenges as well. The rise of been enough. 27
  28. 28. INDIA Pralhad Burli is senior analyst at Deloitte Re- search, India India: Cautious Optimism Part Deux by Pralhad Burli T he Indian economy appears to be stuck in low-level equilibrium. The country’s GDP grew 5.3 percent in the second quarter the economy is expected to perform better over the next two quarters, which is a positive sign amid a host of macroeconomic challenges. of the 2012–2013 fiscal year—one of its low- est quarterly growth rates in the last decade. Jumping political hurdles Investments have been lackluster, but the gov- ernment hopes that its recent push for reforms The motion against the decision to allow will help trigger investments and jumpstart foreign direct investment (FDI) in the coun- the economy. Meanwhile, the central bank try’s multi-brand retail sector took center remains jittery about elevated inflation and stage at the onset of parliament’s winter may be wary of prematurely slashing its policy session. The government announced that it rate. Although the economy is expecting the would open six sectors to foreign investment, government to provide the necessary boost, the and politically, multi-brand retail was the government is unable to increase its spending trickiest. Following several rounds of debates, due to a widening budget deficit. Nonetheless, the United Progressive Alliance, the ruling 28
  29. 29. India Geographiescoalition, emerged victorious in both houses of more than 1 million. In addition, the mini-parliament. This is a big boost for the govern- mum investment must be $100 million, andment because it managed to garner the support at least 50 percent of the investment must beof smaller regional parties who voted in their in back-end infrastructure within three years.favor. The government will likely face less International retail chains deferred their Indiapolitical pressure in the future, but farmer and plans amid political uncertainty and wide-trader unions could up the ante in the coming spread protests. However, the outcome of themonths. However, the central government’s parliamentary vote may hasten their entryworries are limited because the responsibility into states that have already announced theirof implementation lies largely with individual support for FDI in the retail sector. Moreover,state governments. foreign investors looking to invest in aviation, The policy allows foreign players to invest insurance, pensions, and the utilities sectorsup to 51 percent in multi-brand retail, sub- could become more optimistic about prospectsject to certain restrictions. Retail stores can for those opened only in cities with a population of 29
  30. 30. Global Economic Outlook: 1st Quarter 2013 Has growth bottomed out? recovery. Positive economic data from China, According to the seasonally adjusted improved manufacturing activity in the United HSBC Services Purchasing Managers Index, Kingdom, a modest GDP acceleration in the India’s services sector growth declined to United States, and structural reforms in Greece 52.1 in November—its slowest pace in 13 all suggest an improving outlook for the global months—from 53.8 in the previous month. economy, which augurs well for India’s growth. Yet, the index has remained above the 50 mark since November 2011, which suggests Looking at the central an expansion. Moreover, service providers are optimistic about the short-term business bank for help outlook. Meanwhile, in November, the HSBC The Reserve Bank of India (RBI) cut its pol- Manufacturing Purchasing Managers Index icy rate by 50 basis points in April, but it has expanded at its fastest rate in five months. The not tinkered with the policy rate since. Instead, index rose to 53.7 in November from 52.9 in the RBI has reduced the cash reserve ratio October because of an uptick in new orders. (CRR) by a cumulative 75 basis points in 2012. The index provides evidence of an uptick in A CRR cut adds liquidity and enhances credit manufacturing activ- availability, which could ity, and the recent The Indian economy impact both deposit performance of the and lending rates. But, infrastructure sec- is trapped between financial markets and tor provides hope for industries have not higher growth in the a burgeoning been satisfied with the coming months. In RBI’s monetary stance, addition, the sub- fiscal deficit, low consistently demanding index for new export a policy rate cut. orders rose to a six- investments, elevated The Wholesale Price month high of 55.9 in Index-based inflation November, suggesting inflation, and high stood at 7.45 percent in a recovery in exports October, slightly lower and broad-based interest rates. than 7.81 in the previ- factory output. ous month. During Overall, the Indian economy is showing the current fiscal year, headline inflation has early signs of a recovery, suggesting that the hovered between 7 and 8 percent. Meanwhile, deceleration may have bottomed out. Auto retail inflation surged 9.9 percent in November sales and production of consumer goods have following readings of 9.75 percent in October stabilized over the past two months. The Index and 9.73 percent in September. The hawks of Industrial Production grew 8.2 percent in would argue that, at its current level, inflation October, its fastest pace in more than a year. remains uncomfortably high. Furthermore, Economic activity, supported by an improve- the government has not made significant ment in the industry and services segments, is headway in terms of fiscal consolidation. The expected to improve. Furthermore, a decline government’s budgeted growth estimate of 7.6 in crude oil prices could further boost GDP percent is a far cry from the current growth growth. Moreover, the global recovery may rate of 5.3–5.5 percent. As a result, projected pick up in near future provided none of the tax revenues will be very difficult to achieve. economies face major set-backs in their Moreover, the telecom spectrum auction left30
  31. 31. India Geographiesa gaping hole in the government’s collection companies with significant overseas presencetarget. Spectrum sale proceeds came in at could benefit through overseas borrowingapproximately $1.7 billion against the govern- for new investments or for paying-off costlyment’s estimate of $5.5 billion. Finally, little domestic debt. On the other hand, loose mon-progress has been made on disinvestment in etary policies in western markets have resultedpublic-sector undertakings. As a result, move- in a low interest environment, and banks’ arement toward fiscal consolidation is unlikely to sitting on massive cash reserves. As a result,be a trigger for cutting policy rates. foreign banks are happy to lend to Indian On the other hand, the doves would make companies as they have relatively favorablea case for a rate cut given India’s high interest growth prospects.rate environment and decelerating growth.However, the RBI governor has resisted apolicy rate cut since the inflation rate is stillbeyond the central bank’s comfort zone.Clearly, the RBI’s focus remains on inflationcontainment and it believes that its currentpolicy stance will likely anchor inflation expec-tations. The RBI is caught between a rock and ahard place, and its policy stance will once againcome under the spotlight in its next policymeeting. It is likely that the RBI may onceagain choose to lower the CRR and hold backon a policy rate cut until inflation recedes tomanageable levels.A rush toward externalborrowing Following the central bank’s decision toraise the limit for external commercial borrow-ing, Indian companies are increasingly turningto overseas markets to raise funds—a trend The Indian economy is trapped betweenlikely to continue over the next few months. a burgeoning fiscal deficit, low investments,According to the new regulation, a company elevated inflation, and high interest rates. Itcan borrow offshore funds to the tune of 75 is difficult to ascertain how the country willpercent of the average foreign exchange earn- break out of this vicious cycle. While the globalings in the immediate past or 50 percent of the economy is recovering, downside risks loomhighest foreign exchange earnings realized in large. India’s GDP has grown at an averagethe past three years, whichever is higher. The rate of 5.4 percent during the first half of theprevious limit was 50 percent. This measure current fiscal year, and the economy may endwill likely serve twin benefits. It could bring the year at a slightly higher growth level. Asome stability to the rupee’s movement against push for reforms is certainly encouraging, butthe US dollar. Furthermore, Indian compa- successful implementation of these reformsnies can save on interest costs by borrowing at is vital, and it may take a while before growthcheaper rates in overseas markets. Therefore, returns to its pre-crisis level. 31
  32. 32. Global Economic Outlook: 1st Quarter 2013AppendixGDP growth rates (YoY %)* GDP growth rates (YoY %)* (Note: Indias fiscal year is April-March) 8 20 6 15 4 2 10 0 5 -2 -4 0 -6 -5 -8 -10 -10 -12 -15 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 12 12 12 07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 12 12 12 US UK Eurozone Japan Brazil China India RussiaInflation rates (YoY %)* Inflation rates (YoY %)* (Note: Inflation data for India is based on the WPI) 6 16 5 14 4 12 3 10 2 8 6 1 4 0 2 -1 0 -2 -2 -3 -4 Jan May Sep Jan May Sep Jan May Sep Jan Mar May Jul Oct Jan May Sep Jan May Sep Jan May Sep Jan Mar Jun Nov 09 09 09 10 10 10 11 11 11 12 12 12 12 12 09 09 09 10 10 10 11 11 11 12 12 12 12 US UK Eurozone Japan Brazil China India RussiaMajor currencies vs. the US dollar* USD-Yen 1.8 100 1.7 95 1.6 1.5 90 1.4 85 1.3 1.2 80 1.1 1 75 Jan May Sep Jan May Sep Jan May Sep Jan May Sep Nov 09 09 09 10 10 10 11 11 11 12 12 12 12 GBP-USD Euro-USD USD-Yen (RHS)*Source: Bloomberg32
  33. 33. AppendixYield curves (as of December 18, 2012)* US Treasury UK Eurozone govt. Japan Brazil govt. China India govt. bonds & notes gilts benchmark sovereign benchmark sovereign actives Russia‡ 3 Months 0.02 0.32 0.02 0.10 7.11 2.72 8.14 6.14 1 Year 0.13 0.38 0.03 0.10 7.09 2.87 8.10 6.19 5 Years 0.73 0.90 0.36 0.20 8.54 3.25 8.10 6.54 10 Years 1.77 1.92 1.38 0.76 9.18 3.59 8.15 7.01Composite median GDP forecasts (as of December 18, 2012)* US UK Eurozone Japan Brazil China Russia 2012 2.2 -0.1 -0.5 1.7 1.5 7.7 3.6 2013 2 1.1 0 0.65 3.8 8.1 3.45 2014 2.8 1.6 1.2 1 4 7.9 3.8Composite median currency forecasts (as of December 18, 2012)* Q1 13 Q2 13 Q3 13 Q4 13 2012 2013 2014 GBP-USD 1.6 1.6 1.58 1.6 1.6 1.6 1.58 Euro-USD 1.28 1.27 1.26 1.27 1.28 1.27 1.28 USD-Yen 82 83 84 85 80 85 88 USD-Brazilian Real 2.05 2.02 2.01 1.99 2.02 1.99 2.05 USD-Chinese Yuan 6.21 6.18 6.15 6.13 6.25 6.13 6.04 USD-Indian Rupee 53.75 53.3 52.9 52.4 54.01 52.4 50 USD-Russian Ruble 30.78 31.01 31.29 31.33 31.37 31.33 32.1OECD composite leading indicators (amplitude adjusted)† US UK Eurozone Japan Brazil China India Russia Dec 10 100.46 101.56 101.61 100.49 101.43 101.72 101.33 102.74 Jan 11 100.65 101.57 101.70 100.61 101.37 101.69 101.12 102.90 Feb 11 100.77 101.54 101.73 100.66 101.21 101.56 100.83 102.93 Mar 11 100.80 101.48 101.69 100.64 101.00 101.39 100.47 102.80 Apr 11 100.72 101.34 101.58 100.56 100.72 101.20 100.07 102.58 May 11 100.57 101.12 101.41 100.47 100.35 101.04 99.70 102.34 Jun 11 100.35 100.81 101.19 100.39 99.90 100.90 99.42 102.16 Jul 11 100.13 100.43 100.92 100.34 99.42 100.77 99.24 102.01 Aug 11 99.95 100.02 100.64 100.30 98.99 100.64 99.13 101.94 Sep 11 99.89 99.65 100.39 100.30 98.64 100.51 99.08 101.93 Oct 11 99.97 99.37 100.19 100.35 98.39 100.37 99.11 101.99 Nov 11 100.17 99.22 100.05 100.45 98.23 100.23 99.19 102.08 Dec 11 100.42 99.20 99.98 100.57 98.23 100.07 99.23 102.15 Jan 12 100.65 99.26 99.95 100.69 98.37 99.94 99.17 102.16 Feb 12 100.81 99.35 99.92 100.76 98.62 99.85 99.01 102.05 Mar 12 100.88 99.44 99.89 100.77 98.87 99.74 98.76 101.72 Apr 12 100.88 99.52 99.83 100.71 99.07 99.62 98.46 101.15 May 12 100.82 99.59 99.74 100.61 99.21 99.55 98.13 100.47 Jun 12 100.76 99.71 99.64 100.48 99.33 99.52 97.80 99.85 Jul 12 100.73 99.87 99.53 100.36 99.41 99.51 97.50 99.44 Aug 12 100.75 100.06 99.43 100.27 99.43 99.53 97.29 99.23 Sep 12 100.84 100.28 99.36 100.20 99.39 99.53 97.24 99.14 Oct 12 100.93 100.50 99.31 100.17 99.28 99.56 97.26 99.09*Source: Bloomberg ‡MICEX rates †Source: OCEDNote: A rising CLI reading points to an economic expansion if the index is above 100 and a recovery if it is below 100. A CLI which is declining points to an economicdownturn if it is above 100 and a slowdown if it is below 100. 33
  34. 34. Global Economic Outlook: 1st Quarter 2013Additional resourcesDeloitte Research Thought LeadershipDeloitte Review Issue 12Asia Pacific Economic Outlook: China, Japan, Malaysia, and Thailand.Please visit for the latest Deloitte Research thought leadership or contactDeloitte Services LP at: more information about Deloitte Research, please contactJohn Shumadine, Director, Deloitte Research, part of Deloitte Services LP,at +1 703.251.1800 or via e-mail at
  35. 35. AppendixContact informationGlobal Economics Team Global Industry Leaders U.S. Industry LeadersRyan Alvanos Consumer Business Banking & Securities andDeloitte Research Antoine de Riedmatten Financial ServicesDeloitte Services LP Deloitte Touche Tohmatsu Limited Robert ContriUSA France Deloitte LLPTel: +1.617.437.3009 Tel: + Tel: +1 212 436 2043e-mail: e-mail: e-mail: Energy & Resources Consumer & Industrial ProductsPralhad BurliDeloitte Research Carl Hughes Craig GiffiDeloitte Services LP Deloitte Touche Tohmatsu Limited Deloitte LLPIndia UK Tel: +1.216.830.6604Tel : +91.40.6670.1886 Tel: +44.20.7007.0858 e-mail: cgiffi@deloitte.come-mail: e-mail: Life Sciences & Health Care Financial Services Bill CopelandDr. Alexander Börsch Deloitte Consulting LLPDeloitte Research Chris Harvey Deloitte LLP Tel: +1.215.446.3440Germany e-mail: bcopeland@deloitte.comTel: +49 (0)89 29036 8689 Tel: +44.20.7007.1829 Power & Utilities and e-mail: Energy & ResourcesDr. Ira Kalish John McCueDeloitte Research Life Sciences & Health Care Deloitte LLPDeloitte Services LP Pete Mooney Tel: +216 830 6606USA Deloitte Touche Tohmatsu Limited e-mail: jmccue@deloitte.comTel: +1.213.688.4765 USAe-mail: Tel: +1.617.437.2933 Public Sector (Federal) e-mail: Robin LinebergerDr. Carl Steidtmann Deloitte Consulting LLPDeloitte Research Manufacturing Tel: +1.517.882.7100Deloitte Services LP Tim Hanley e-mail: rlineberger@deloitte.comUSA Deloitte Touche Tohmatsu LimitedTel : +1.303.298.6725 USA Public Sector (State)e-mail: Tel: +1.414.977.2520 Jessica Blume e-mail: Deloitte LLPIan Stewart Tel: +1.813.273.8320 Public Sector e-mail: jblume@deloitte.comDeloitte Research Paul MacmillanDeloitte & Touche LLP Deloitte Touch Tohmatsu Limited Telecommunications, MediaUK Canada & TechnologyTel: +44.20.7007.9386 Eric Openshaw Tel: +1.416.874.4203e-mail: Deloitte LLP e-mail: Tel: +1 714 913 1370 Telecommunications, Media e-mail: & Technology Jolyon Barker Deloitte & Touche LLP UK Tel: +44 20 7007 1818 e-mail: 35
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