IHS Top 10 Economic Predictions for 2013 - World Growth Will Stabilize in 2013

After having slowed down from 4.2% in 2010 to 3.0% in 2011 and around 2.5% in 2012 (with the Eurozone and Japan going back into recession), the growth rate of the world economy will hold steady at 2.6% in 2013.

Moreover, the stage will be set for a modest acceleration of growth in the latter part of the year and during 2014.

This cautiously upbeat outlook is predicated on the expectations that:

1. the massive monetary stimulus put in place in many key economies over the past year and a half will have some positive impact on growth; and
2. that the current episode of “extreme uncertainty”—related to the US fiscal cliff, the Eurozone debt crisis, China’s growth, and instability in the Middle East and Africa—will become less intense and that worries about many of these risks will diminish.

Top 10 Economic Predictions for 2013

1. The US recovery will gradually pick up steam—unless it falls off a cliff.
The dynamics for a gradually accelerating US recovery are already in place. The balance of forces affecting US consumer spending have turned positive. Housing is—finally—showing signs of life and can be expected to keep improving over the next year. As global growth begins to reaccelerate (albeit gradually), exports will follow suit. Last but not least, as the uncertainty about the fiscal cliff and deficit/debt reduction is resolved, US businesses are likely to spend and hire more. This means growth will average around 2% next year. Of course, in the unlikely event that the US falls off the fiscal cliff for an extended period of time, a recession will probably be unavoidable.

2. European growth will be weak in the north and negative in the south
Recent policy actions by the European Central Bank and EU governments have reduced the financial risks related to the Eurozone sovereign-debt crisis and helped to reduce long-term interest rates in the hardest-hit economies. Nevertheless, during the coming year, the economies in Southern Europe will remain deep in recession territory, mostly because of tough austerity programs and very high unemployment rates. Unfortunately, this will drag down the economies in Northern Europe as well. Some (including Germany) will see positive but weak growth. In others (including Belgium, France, and the Netherlands), growth will be flat to slightly down. On balance, this means a contraction of around 0.2% for the Eurozone economy in 2013.

3. China’s economy will slowly gain momentum
Since 2010, the Chinese economy has decelerated significantly, with growth falling from over 10% to around 7.5%. Fortunately, there are already signs that growth has bottomed out and that a gradual pickup in momentum is in the offing. This trend will likely continue in 2013. Modest stimulus seems to have been effective in limiting the depth and duration of the domestic demand downturn. With the leadership transition now complete, there could even be a little more stimulus in the coming year. Furthermore, export growth can be expected to rebound, thanks to continuing (and improving) growth in Asia and the United States. All this will translate into growth of around 8% for China in 2013.

4. Other emerging markets will also show signs of life
Weak economic growth in the United States, recessions in Europe and Japan, and a soft landing in China all took a toll on growth in other emerging markets last year. This was compounded by the tight money policies that many of these economies had in place through the fall of 2011. With monetary conditions now easier than a year ago, and with prospects for the world economy looking a little brighter, the outlook for emerging markets in 2013 is also looking sunnier. This is especially true in Asia (and particularly the ASEAN economies), where domestic demand growth has been fairly strong and where there is scope for more stimulus, if needed.

5. Commodity prices will move sideways again
Despite a good deal of volatility during the past 12 months, commodity prices are roughly at the same levels they were a year ago. Chances are good that 2013 will see a repeat performance. There are mild downward pressures from soft growth and relatively high inventories in some markets (especially oil). On the other hand, stronger growth in China and the rest of Asia could push in the opposite direction as the year progresses. Meanwhile, tensions in the Middle East and North Africa could be a wild card in oil markets, driving prices up if the instability in the region gets worse or pulling them down if there is a de-escalation.

6. Inflation will remain tame
Soft growth, large output gaps, and high unemployment rates in the past couple of years have significantly reduced price pressures, with the rate of inflation down between 2011 and 2012 in all but one region. This benign state of affairs is likely to continue through 2013, despite worries about the inflationary potential of the massive amounts of liquidity sloshing around the global economy, and despite the recent rise in food prices (which is likely to be temporary). In fact, in the developed world and some emerging regions (notably Asia, the Middle East and Africa), inflation will continue to drift down over the coming year.

7. Central banks will mostly be in wait-and-see mode
The behavior of central banks over the past year and a half can best be described as “aggressive easing.” Nevertheless, as growth prospects in many of the world’s key economies start to look better, central banks will begin to take a more neutral stance, putting monetary policy on hold. While a little more easing (interest-rate cuts and/or quantitative easing) by the Federal Reserve, the European Central Bank, the Bank of England, and the Reserve Bank of India is probably in the cards, other central banks are likely to take a more cautious approach to any further stimulus, while still keeping a lookout for any signs of renewed weakness in the coming year.

8. Fiscal policy will stay tight or become tighter
This is mainly true of the United States, the Eurozone, and Japan, all of which face large and growing government debt ratios. US fiscal policy will tighten, whether or not the economy goes off the fiscal cliff. The mostly likely scenario calls for a gradual further reduction in the deficit, which will help to stabilize the US debt ratio, without hurting growth unduly. In Southern Europe, austerity is damaging growth prospects; but this will not deter further tightening. Moreover, France will also be pressured to constrict fiscal policy even more. It has one of the biggest deficit-to-GDP ratios of the non-crisis Eurozone countries and its government spending-to-GDP ratio is one the highest in the developed world.

9. The US dollar will be stronger against the euro and flat against the rest
During the coming year, economic fundamentals (e.g., growth differentials and current-account balances) will tend to favor the dollar, especially relative to other developed economy currencies. On the other hand, as the growth outlook in the emerging world improves and capital flows into these economies ramp up once again, the upward pressure on these currencies could intensify, balancing out some of the positive forces working on the dollar. Meanwhile, as the world’s principal reserve currency, the US dollar is very sensitive to swings in investor sentiment and changes in risk aversion. Consequently, enduring worries about the Eurozone debt crisis will tend to favor the dollar over the euro and other risky currencies.

10. The risks facing the global economy will be more balanced
Over the past year, the risks facing the global economy were skewed to the downside. In the coming year, not only will some of the big-four threats—another US recession, a Eurozone meltdown, a Chinese hard landing, and a war in the Persian Gulf—become less menacing, but there could be some upside surprises as well. Chief among these is pent-up demand from consumers and businesses. In the wake of the Great Recession and subsequent Great Stagnation, households and companies have been very cautious about their spending, preferring to save more and reduce their debts. There is some evidence that this process may be winding down—especially in the United States and parts of Asia.

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