Holly Cook: For Morningstar, I'm Holly Cook and I'm joined today by Keith Wade, Chief Economist and Strategist of Schroders, to have a look back at 2012 and turn our mind to what we can expect in 2013. Keith, thanks very much for joining me.
So, why don't we have a little glance over our shoulder first off. What would characterise 2012 in your mind? What are the kind of key things that stand out?
Keith Wade: I guess the main thing that stands out has been that the world economy has really being quite sluggish in growth and people have been disappointed by the pace of activity, particularly in Europe. A year ago, people were expecting a difficult year for Europe, but they didn’t expect it to be as quite as bad as it's turned out. I guess, the other thing that's characterised the year and this is probably in the last few months is policymakers do seem to have the grasped the nettle to some extent. So we’ve seen quite a change in Europe in terms of what the ECB has been doing, in terms of the political willingness to support the euro, and of course, in the US they’ve really stepped up quantitative easing. So, I think from the policy side that’s kind of been the response that’s come through.
Cook: So, if we look forward then: 2013. Can we expect more of the same at a broad level?
Wade: I think we can because many of the forces that shape growth this year are still going to be in play in 2013. So, fiscal policy in particular, which has had quite a big effect this year and probably a bigger effect than most economists expected. We’re still going to see tighter fiscal policy in 2013. And in the US, of course, the debate about the ‘fiscal cliff’…although, we think they’ll avoid the fiscal cliff, they are still going to be tightening fiscal policy next year.
So that’s going to weigh on growth and of course the eurozone is going to be tightening fiscal policy, Japan will be tightening fiscal policy. So, I think that’s going to have quite a big impact in terms of shaping the outlook for growth. But again, I think people will look to the policymakers now. Now that policymakers seem to be actually acting, we’re going to expect them to do a lot more in 2013.
Cook: So let’s sort of drill down into some of the areas there. Eurozone, so double-dip recession already, should we be thinking of triple-dip, quadruple-dip even and is it going to be the same story for the next few years?
Wade: Well, it could be. I think the only thing to say though is that we've become a bit more optimistic because the commitment of the politicians and the ECB to keeping the euro together means that we think that Greece will stay in the eurozone now. It's not going to come out in 2013. The package that’s been agreed will take them right through 2013. Now, there could be an issue in 2014 when they have to have achieved a primary surplus, for example, and I think that's going to be quite tough, but next year could see a relative period of calm in the eurozone on the political front, which would be quite helpful I think for businesses and for investors.
Cook: And so how about the US across the pond, I mean they've had a sort of relatively steady year. What about next year?
Wade: Well, next year I think will be a little bit more disappointing in the sense that although growth has been okay this year, people are beginning to push up their forecasts and I think that's a bit early, because if they avoid the fiscal cliff they're still going to be tightening fiscal policy by at least 1% of GDP, possibly more. And what we've learned from 2012 is that these periods of fiscal tightening have a bigger impact on growth than they have done in the past. It's quite clear that the fiscal multipliers are higher, and that means, I think, that we'll probably go into 2013 relatively optimistic, get through the fiscal cliff, but then things will probably start to slow down again, and there'll be a bit of disappointment on growth.
Cook: So how about then the emerging markets, the leaders of global growth; China has almost been a buzzword for 2012. Is that still going to be the story next year as well?
Wade: Well, I mean 2012 has been interesting because, I think, in some ways 2012 has been disappointing for some of the emerging markets because they have not being able to decouple from the West. A lot of people said they will be able to decouple [as] they have their own growth, but really they've suffered quite a slowdown. But having said that, China avoided a hard landing in 2012, which was one of the big risks that people worried about.
So, as we go into 2013, I can see signs that things are beginning to pick up. The industrial cycle is beginning to turn. We would see that being very much an inventory cycle. It's just been a case of companies having to adjust their production, rather than getting a big increase in demand. So, again they will go in on a reasonably high note, but I think again we could see them slowing down again. So, a good start to the year, but probably slowing down. But certainly, you know the experience of 2012 has been that these economies are quite linked still into the US and Europe.
Cook: So this is interesting: potentially a bit of disappointment from the US point of view; potentially little bit of disappointment from the emerging market point of view; but eurozone kind of shaping up to perhaps be on the right track?
Wade: Well it is, because people have become very depressed about the eurozone and their expectations are not really very high. So, you know for once, we found ourselves, although we are not particularly optimistic, we are probably not that different from consensus. We are forecasting a fall in GDP for the eurozone next year of minus 0.3%, which is fairly close I think to what the IMF are expecting and others. So, it means that the scope for disappointment is probably not as great as we would have said it was a year ago.
The other thing about Europe, of course, is that the markets have sold off really heavily. European equities are beginning to come back, Germany is performing quite well. But generally, some of the peripheral countries have not performed as well as others. And so, it seems to us that Europe presents a bit of an opportunity from an investment perspective that actually there could be some scope for Europe maybe to surprise on the upside.
Cook: So from the investor's point of view then should the New Year resolution be really to be looking at European equities?
Wade: Yes, I think it is, I think it is. Because I think there is a lot of value there. And of course, the other point is that if the political situation is calming down a bit, then we won’t get all these adverse headlines that keep coming through. I mean, there are a few hurdles to overcome, I mean we do have the Italian election for example, and we need to know what Mario Monti is going to do. Whether or not he is going to still have a influence on policy.
And the other thing that we're looking for is that the Spanish government will request a bailout in early next year, so that the ECB can start buying Spanish bonds. So, that’s going to be quite important. But the ECB is ready to do it, they just need the request from Spain. So, we think those things will fall into place and then you've really got quite a long period then until the Germany elections in September, which I think will be relatively calm.
Cook: Well, I think it’s great to turn what’s been a kind of depressed outlook for the eurozone into something a little bit more positive. Thanks very much for that.
Wade: Thank you.
Cook: For Morningstar, I am Holly Cook. Thanks for watching.
