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Article / 14 January 2013 at 18:20 GMT

Q1 Macro Outlook: Doldrums revisited

Steen Jakobsen Steen Jakobsen
Chief Economist & CIO / Saxo Bank

In future, we will make the following table our reference point for our macro analysis.


This is born from Bridgewater’s Fair Weather models, which allow for four different scenarios, each with a 25 percent probability in a perfectly balanced world. The real world is never in balance, of course, but the model is still useful and is a way to indicate the general outlines of our preferred macro scenario.

For the first quarter of 2013, we believe that inflation expectations will rise while growth will fall (top right corner). This means that Saxo sees:

  • Lower than consensus growth
  • Higher than consensus inflation expectations

Negatives:  A one percent fiscal drag globally from fiscal restraints, rising social tension, and higher food prices

Positives: Shale gas (lower energy prices), monetary conditions, improving sentiment, belief in extend-and-pretend

Monetary policy: We do not see emerging markets cutting rates as aggressively as consensus does, but we see the European Central Bank being more aggressive than consensus and the Federal Reserve more neutral (less dovish) than consensus.

Rising inflation expectations
We see two major drivers of higher inflation expectations:

During the last 10 years China has been a net exporter of deflation through falling production costs. This is no longer the case, if anything, one of the key changes in 2013 could be more re-shoring of jobs back to the US and even Europe.

Secondly, we judge that the US Federal Reserve’s new policy thresholds (6.5% natural unemployment rate and 2.5% inflation) are flawed. The Fed has made monetary policy mechanical and with an expected expansion of 33 percent of its balance sheet, the market will start questioning the Fed’s ability to help the economy and contain inflation.

Growth lower
The macro outlook for Q1 requires dealing with binary events like the US fiscal cliff and the Italian election. The final bill for the deal struck on New Year’s Eve is likely to be between 1.5 percent and 2.0 percent by the time we reach the final details in March 2013.

We need to decide whether some of the recent improvements in data, PMIs and other sentiment indicators are truly a reflection of better fundamentals or whether they are driven by an expected improvement. The official consensus on world growth is rather sanguine and we wonder how the global economy will fare with higher levels of debt and austerity.

Just as important will be how the emerging market growth engine transitions from export focused economies towards domestic consumption without losing growth and productivity.

Here, history tells us that these transitions take much longer than the market allows for, but unlike in the US and Europe where reforms are merely talk, we firmly believe Asia and primarily China will ultimately go down the right path, only more slowly than perceived.

World Growth Forecast Consensus and Saxo Bank
Our growth forecasts for Q1 and 2013 for the G-10 and the world are generally lower than consensus based on our assumption that the recent improvement in sentiment is merely a massive “mood swing” driven by the improved financial conditions rather than economic fundamentals. We do not feel that enough has been done on legacy debt and actual structural reform, leaving us with no choice but to be more negative on Europe, sceptical on the US and awaiting transformation in Asia.

Macro forecast

Note also that since the recovery peak in growth in 2010 the world economy is again slowing down dramatically. Mounting evidence suggests that economies no longer can allocate capital to their higher marginal utility – we have Capitalism without markets and capital, replaced by Statism.

Fiscal adjustment will continue to hamper world and G-10 growth. Government deficits contracted by 0.75 percent both in 2011 and 2012, and in 2013, austerity could see a further decrease of 1.0 percent of GDP, which is a strong brake on growth as the fiscal multiplier is particularly high in weak economies. The austerity focus will shift from Europe, which has seen the most austerity so far, to the US, which needs to, and will, see more austerity in 2013 than in 2012.

There are high hopes that emerging markets see more lax monetary conditions and that this will provide a boost for the global economy, but we are very doubtful that food prices can be contained in 2013, meaning we are bullish on inflation expectations rising in Asia on agricultural prices and globally through higher export prices from China and Asia in general.

We see some support for growth from easy monetary conditions, as central banks continue to enable politicians’ overspending ways. The threat of the Outright Monetary Transactions from the ECB and yet another wasted trillion or so US dollars of monetary support through expansion of the Fed’s balance sheet from USD 3 trillion to USD 4 trillion. Nice job – maybe it is time to invest in paper stocks?

We see more long-term growth support coming from the true paradigm shift we saw in 2012 from shale gas and its ability to transform the supply side of energy production. The US is now producing electricity with increased use of natural gas – which is trading at 10-year-low prices – meaning a net saving to US corporates and consumers. What is saved is earned, and we think we are entering a long-term structural change in energy prices. During the next decade we could for the first time pay less, not more, for energy consumption. This will be the biggest net contributor to growth when this cycle truly turns.

Global growth and its outlook will be very path dependent, again, on the macro mistakes we have come to expect from policymakers. We need more micro, and less macro, or a clear mandate for change to reduce the unemployment numbers, because the only real multiplier that works is a belief in ourselves rather than in money printing. 2012 became a low for this, but we expect 2013 to improve as a new low in growth and monetary policy impotence leads us closer to getting on the right path by the end of 2013, in stark contrast to the complacent, naive close we had to 2012.

Hank Hank
Steen, what's happening to EURCHF?
Mariani Carlo Mariani Carlo
Hi Steen, portfolio rotation seem the reason to be long euro vs usd -gbp-fsv. do you think that this situation should continue for next 3-4 mth? target euro dollar 1.35-1.37? tks a lot


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