The Global Economy in 2013 - 5 Key Trends" - A Global Perspectives White Paper - January 2013 - final


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2013 is set to be a pivotal year for the world economy. Seismic changes are taking place across the globe, transforming major economies as they try to recover from the Global Economic Crisis of 2008.
In this White Paper we will examine the 5 key global economic trends shaping the World in 2013.

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The Global Economy in 2013 - 5 Key Trends" - A Global Perspectives White Paper - January 2013 - final

  1. 1. A Global Perspectives White Paper The Global Economy in 2013 5 key trends By Shane Brett, Managing Director Global Perspectives th Date 16 January 2013
  2. 2. Contents IntroductionIntroduction 21. US economic recovery continues 2 2013 is set to be a pivotal year for the world economy. Seismic changes are taking place across the globe,2. Chinese Infrastructural Expansion3 transforming major economies as they try to recover from the Global Economic3. German Election dominates Crisis of 2008.Europe 4 In this White Paper we will examine the 5 key global economic trends shaping4. Global Currency Volatility 5 the World in 2013.5. Commodity prices begin to 1. US economic recovery continuesescalate 6Conclusion 7 The US economy is undergoing a slow, structural recovery from the debt-fuelled expansion at the start of this century. In 2012 the US economy grew at approximately 2% - far more than the Euro Zone or UK. Recently the US has easily been the best performing Rich World economy. Despite the recent media fixation with the “Fiscal Cliff” and fear of the forthcoming debt ceiling negotiations, the long term is outlook for the US economy is broadly positive. The housing market has stabilised and consumer confidence is slowly returning. The political instability of 2012 has been resolved by Barack Obama’s decisive election win. There is now certainty that Obama will be President for the next four years. Spending will increase on health as “Obamacare” becomes the established law of the land and the country gears up for its implementation
  3. 3. In 2013 the US will continue its important underlying economic trends.astonishing windfall of cheap In a world of future escalatingdomestic energy. The US will commodity prices the US is in thestart to seriously expand its enviable position of being food (andexploration of Shale Oil. The potentially) energy independent.Shale Gas story is well known. Crucially, it has a solid futureWhat is newer is the use of the demographic structure, with a youngsame “fracking” technology to growing population. It also remains theaccess colossal reserves of world centre for economic creativity anduntapped oil in Texas (and new business start-ups.especially) in North Dakota. Most of the world would be happy toThis year will see a relocation of have America’s intensive industries fromaround the world to the US, totake advantage of far cheapergas prices (e.g. Gas in Japan is 2. Chinese Infrastructural Expansionfour times as expensive). This willresult in trade disputes with its China is set to ramp up infrastructuralallies who will resent having spending in 2013. It will spend overimportant parts of their heavy 1Trillion Yuan (approx $157 billion) thisindustry move to America, while year. This should provide a boost to thethey are trying to come out of world economy (even if this spending isrecession. unsustainable).Short term the effects of on-going The nature of China’s One-party systembudgetary and debt ceiling crises means that large infrastructural projectsin Washington may be uncertain, can be approved and implementedunpleasant and unhelpful, quickly. China is increasingespecially to an economy still in infrastructural spending in an attempt torecovery mode. The fact that the provide a soft landing for its economy,unemployment rate is still so high battered by faltering exports, a burstingand there is a general fear of property bubble and rampant wage priceeconomic fragility, underlines the inflation.scale of the 2008 economiccrisis. The big unknown for the The key point for China this year isUS is how the effects of massive whether this infrastructural spending willmoney printing (Quantitative be wasted on empty airports andEasing) will affect the economy in unused highways, or if it will be used tothe years ahead. Currency modernize the country and lay thevolatility is virtually guaranteed. foundations for a solid future economy.However the panic around the Transportation, electricity and otherFiscal Cliff or Debt Ceiling similar infrastructure developments (e.g.negotiations masks more road construction & port expansion) willGlobal +44 (0) 20 3239 2843
  4. 4. be the major cornerstone of leadership changeover and tension withChina spending 2013. its neighbours.The expansion of the Chinese These issues will be examined in detailelectricity network will push up in the forthcoming Global PerspectivesCopper prices. The government White Paper –is planning to upgrade theelectricity network for 500 million “China on a Knife edge”.people – larger than the entireUnited States grid. Thegovernment is also planning toextend its high speed train 3. German Election dominatesnetwork to a large number of Europesecond-tier domestic cities, in anattempt to drive growth and more In the European Union, the Germaneven economic development. It is election in September will completelyalso building a huge number of dominate the year in Europe. Thenuclear plants around the largest trading block in history willcountry, to wean itself off filthy continue its incremental approach to thecoal fired electricity plants. Euro Zone crisis. Angela Merkel will be seeking re-election and is keen not toGlobally Chinese companies are upset the electorate by being seen tostarting to bid more aggressively commit the German purse to furtherfor both US companies and economic bailouts.domestic American contracts.This will be a cause of friction for To date she has done an excellent jobthe two countries over the next of disguising from her electorate bothfew years. The expansion of the true scale of the crisis and the sizeChinese domestic infrastructural of the cheque Germany needs to writespending should be good news to hold the Euro Zone together.for commodity dependenteconomies like Canada and Consequently prior to the election littleSouth Africa, even if the scale of substantive progress will be made inits spending is far smaller than ending the Euro Zone Crisis prior to thethe stimulus of 2008 and its level election. Gradual reforms around theof on-going infrastructural appointment of a Euro Zone Bankingspending is unsustainable in the Supervisor will take place, but attemptslong run and will bring to agree a cross-border depositdiminishing economic returns. guarantee are unlikely to get far. Most importantly any attempt to moveChina is also facing a host of towards “debt mutualisation” (i.e. whereother problems across its the Euro zone countries jointly issue andeconomy and society (e.g. guarantee debt) will be swiftly and firmlybanking bad debts, an unhappy rejected.middle class, a choppy politicalGlobal +44 (0) 20 3239 2843
  5. 5. Joint Euro Zone debt would drive 4. Global Currency Volatilityup the cost of German borrowingand force it to properly backstop The effects of widespread moneybasket cases like Greece. creation (i.e. Quantitative Easing orDespite a gradual German “QE”) by the Developed World’s Centralrealisation that long term debt Banks have not been fully appreciated.mutualisation will be required; it is This is the year these effects will slowlynot a policy that Merkel can sell start to manifest themselves in theto the German people this year. World economy. This will be represented by more widespreadThis means 2013 may bring currency volatility.disappointment to peripheral bailout countries like Ireland and The US Dollar and Euro may weakenPortugal who are faithfully significantly this year, or be subject toimplementing austerity packages. far more volatile exchange rateThese countries hope to get a movements. The Australian Dollar inGreek style debt write off in the particular is laughably overvalued.near future. Besides some Though the Aussie currency may remainopaque tinkering with Ireland’s strong for some time (if China continuesPromissory Notes, they will likely its slow recovery), it is the mostto wait until after the German overvalued currency in the world nowelection for any significant relief. that its commodity export boom is subsiding, its domestic economyThe main economies of Europe slowing and interest rates are on thewill teeter between zero growth way down.and recession. Political crises willflare up in both Italy and Spain, The Chinese Rembindi will continue towhile the UK will agree to hold strengthen, staying at the upper end ofsome sort of referendum its permitted trading band for theloosening its ties to the European foreseeable future. This may give theUnion. A major EU member has US Dollar and Euro some breathingnever done this before. It could space and lessen talk of currencyhave a huge effect on the future manipulation in Washington.of the European continent. The Euro, however, will remain volatile. The ECB engaged in massive money creation in late 2011 early 2012 (its “LTRO” operations). This 3 year program will have to be repaid at the end of next year and it will interesting to see what effects this has on banking industry in the Euro Zone. A flare up of the Euro Zone crisis (perhaps due to a Spanish or Italian bailout or re-electionGlobal +44 (0) 20 3239 2843
  6. 6. crisis) will see the value of the long decline in commodities prices. Barsingle currency quickly plummet. oil, commodities prices declined progressively throughout the whole ofFinally while QE has prevented a the twentieth century. Food, metal andvery deep recession, it is minerals all became much cheaper inimportant to note that this level of real terms (by about 70%).money creation is unprecedentedand its outcome largely unknown. Ten years ago this process came to anHistorically from Rome and end.Byzantium in the 3rd and 10thCenturies, to Weimar and In fact, in a matter of only a decade theZimbabwe in the 20th and 21st whole of this decline was reversed. TheCenturies, massive currency price of vital commodities like Iron Ore,debasement has always been a Copper and especially foodstuffs allpredecessor to high inflation and began to rise sharply, as the BRICeconomic decline. countries vastly increased their commodity consumption. Only theIt seems likely that inflation will global crisis of 2008 managed to sateindeed start to rise in the years this commodity price acceleration. Suchahead as more money chases was the size of economic crisis thatthe same amount of goods. This many commodities collapsed in price.was always the intention of theUnited States. This process is now beginning to reverse and the “Commodity SuperIt is the only realistic way it can to cycle” will resume in earnest in 2013.devalue in real terms the size of Despite tepid or negative economicits gigantic national debt. growth in the Rich World, China’s latest internal infrastructural expansion will boost demands for the main metal commodities (Iron ore and Copper).5. Commodity prices begin toescalate The world is already facing a zinc shortage as the main producing minesCommodity prices have been soft begin to close in the next eighteenfor the last couple of years, as months. The world is also facing athe Rich World attempted shortage of phosphorous, which is aunsuccessfully to resume vital ingredient used to make fertiliser.economic growth. This downward Phosphorous has no replacement and itprice trajectory will come to an cannot be made. 85% of high gradeend in 2013. Commodities will phosphorous is controlled by onebegin to resume their upwards country – Morocco. We are runningmarch. short and without it will not be able to feed the planets fast growing population.The last ten years has seen thecomplete reversal of a centuryGlobal +44 (0) 20 3239 2843
  7. 7. The impact of increasing This process will continue in 2013.commodity prices will be mostkeenly felt in the production of The future of commodities will befood. The planet will add 140 examined in far more detail in “Themillion people this year (nearly Commodity Super cycle”, the new booktwo new Germanys). The rate of by Shane Brett, which will be released inpopulation increase is driving the Summer 2013.underlying trend in commodityprice escalation. 2013 will be thenext stage in this process. ConclusionBad harvests over the last fewyears’ means high global grain The world economy is facing anprices may move higher if the important year in 2013. Governmentsclimate remains volatile (as will be trying to simultaneous endseems likely for the foreseeable budgetary, economic and currencyfuture). Food riots took place in crises in China, the US and Europe.over 40 countries in 2007/8 and Against this background economicwere a major reason for the growth will start to pick up but will facepolitical revolutions in the Arab twin headwinds of volatile currenciesworld. Many important countries and increasing commodity prices.are unable to feed themselves(e.g. China, Israel) and depend It will be a challenging global economicon importing food from global environment.grain and rice producers like theUS and Thailand.On a positive note, despite the Sign up for all Global Perspectivesincreasing cost of commodity monthly White Papers at-extraction and production, themelting of the North Pole ice caps!whmeans in 2013 new regular itepapers/c1a4eshipping routes will begin acrossthe Arctic. In the years ahead thiswill be a major economicadvantage to Russia, Canada, Order the brand new book-the US and Scandinavia.Major technical investment is “The Future of Hedge Funds”underway to try and extend fallingyields on many foodstuffs. By Shane BrettRenewable forms of energy arebecoming cheaper and more The last 2 decades have transformed the Hedge Fund industry from a nichecompetitive versus fossil fuels. investment segment to a massive global industry.Global +44 (0) 20 3239 2843
  8. 8. this excellent and wide-ranging Trends-industry/dp/1481130226/study of the Hedge Fund industry,Shane Brett examines the mainissues and trends currently taking And for Kindle here-place, and analyses how they willaffect the future of the industry. Funds-ebook/dp/B00AHACY8YThis includes-• Changing investor demandsacross the industry,• New regulatory requirements -including FATCA, AIFMD & theJOBS Act,• Future operational trends -including Operational Due Diligence& Managed Account Platforms,• Emerging Service Provideropportunities – including HedgeFund Administrators,• Hedge Fund investment strategy- including new emerginginvestment opportunities,• Best practice changemanagement – how to manageHedge Fund industry change.The “Future of Hedge Funds” alsoexamines the current and futureglobal economic environment andwhat this will mean for HedgeFunds in the years ahead.Available from Amazon inpaperback here-Global +44 (0) 20 3239 2843