Outlook 2013-2014 : No Spectacular Upswing in Sight

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The Eurozone outlook looks brighter and this is good news. Unfortunately the world economic outlook remains constrained by structural weaknesses. Our forecasts, at respectively 3.1% and 3.3% for 2013 and 2014, remain in the low range established for 2012, thus removing any doubts about the risks of inflationary pressures or of a bond crash.

On the positive side: the concerns we had in the beginning of this year are no longer looming over us

–  In the Eurozone, consumer confidence is picking up as austerity policies get phased out.  Intra-regional trade should progress and the Eurozone should recover from recession by the end of the year.
– The U.S. pulls back from the fiscal cliff and real estate market recovery is no longer in doubt. Household wealth and corporate profits are at a historic high, while unemployment is declining.

On the negative side: structural restraints to growth are multiplying

– Europe is out of the woods, but not on the path to growth. The economic policy shift came too late and is too fainthearted. The crucial questions on the euro area’s future have yet to be answered.
– The U.S. outlook is penalized by insufficient productivity gains and low savings rate. High profit levels won’t be able to considerably accelerate job growth and the wealth effect is constrained by the historic-low level of personal savings. We revised downward our forecasts from 2,7% to 2.2% for 2014.
– The lack of coordination has limited the impact of monetary policy moves and there was no real considerable global economic stimulus.
– The structural inadequacies of emerging economies have become an increasing handicap. The Chinese transition will take time as it can’t be as rapid as the rate at which exports decrease. Endemic inflation in other major emerging markets is coming back.

Outlook for 2014: too little improvement to take risk off the agenda

– Not much change in our scenario for 2013, but a sharp downward revision for 2014.
– Global growth revised down to 2.9% in 2013 and 3.3% in 2014, from an earlier estimate of respectively 3.1% and 4.1%.
– Our forecasts regarding China and Brazil growth have also been downwardly revised. They are respectively at 7% and 3%, instead of, as predicted in January, at 7.5% and 4%
– Bond market crash? Not in the short run.
– Flagging U.S. growth in the second half of the year will keep the Fed from pulling back too soon.
– Long-term yields in the U.S. will stop rising, settling in below the 2.50% mark until year-end. Instability of the bond market will be on the increase next year despite low growth, as U.S. unemployment falling to around 6.5%.
– The euro will remain firm, at 1,35 USD by the end of the year. Our forecasts have been upwardly revised for 2014.
– Stock markets should become more vulnerable to weak structural growth.


“Tenkan, a term in several martial arts for a swift, 180-degree pivoting move, has provided the economist and Asia specialist Jacques Gravereau with an analogy for illustrating the ability of the Japanese people to carry out radical changes in direction collectively, flexibly, and energetically.”

Does the policy shift initiated a few months ago by the Japanese authorities qualify as tenkan? On this one, the jury is still out, but in any event, this experiment already represents a key stage in the crisis affecting the developed countries.

To highlight its importance, we are publishing two papers on this question. The first one, a brief attempt to put Japan’s deflationary episode into perspective, seeks to shed light on why the country was previously in so little of a hurry to deal with this affliction, and why it now feels compelled to take an entirely new tack. Download 1st article.

The second paper is by Frank Benzimra, a specialist on the Japanese economy and financial markets based in Asia for about ten years, who has been kind enough to share his thoughts with us. He begins by explaining how Japan managed to make it through fifteen years of extremely high public debt without lapsing into chaos. He then goes on to discuss the pioneering aspects of Prime Minister Abe’s new policy. In conclusion, he puts forward three possible scenarios for the outcome of “Abenomics,” along with the three investment strategies they imply. Departing from our usual practice, we are publishing this contribution in English. Download Frank Benzimra’s article.