At the International SAP Conference for Financial Services in London, Jason Karaian, Senior Editor, Financial Services, Economist Intelligence Unit delivered a global financial services outlook. According to the EIU, the global economy is slowly mending: U.S. economy is improving, European debt crisis is stabilizing, and Japan is showing signs of recovery, but China’s economic growth is slowing faster than expected and QE and central bank stimulus is slowing which has unnerved financial markets.
In summary, do not expect a brisk recovery. There should be a real increase in global GDP of 2.1% by end of 2013 (same as in 2012) but with the caveat of the aforementioned risks. One could say “flat is the new up” to describe the new global economy. Since 2008 to end of 2014, central banks will have added $6 trillion in monetary stimulus but the transference to the global economy has been uneven. Monetary stimulus, including QE, is not expected to end soon but the rate of asset purchases will ease.
A Geographic Breakdown
In the United States, with each new recession, the jobs recovery has taken longer to occur. The unemployment rate is not expected to decrease to 6.5% until 2015. The housing recovery is underway with 1 million new houses expected to be built in 2013. By 2017, the deficit is expected to be 2% of GDP, down from 10% today. However, by 2020, healthcare and insurance costs is expected to be a significant drag on the economy.
In Europe, high government debt, fiscal austerity, and the ongoing recession has kept and will continue to keep GDP growth to below 1% over the next few years. The risk of a financial break up, while prominent in news coverage, is not likely. Rather than being “acute” the economic sluggishness will be more “chronic”. Political turbulence and improvised and incoherent fiscal and monetary policies will continue to add to this chronic condition.
In the United Kingdom, QE has had very little effect on bank lending but the economic downturn could have been much worse without intervention. Growth is forecast to be hovering around 1% over the next few years. According to the outgoing head of the UK Central Bank, “it is a ‘paradox of policy’ where what’s needed today is not what’s needed tomorrow to improve the economy”.
In Japan, QE has been hyper aggressive, with some good but mixed results. The GDP is expected to grow 1.7% this year and 2% next year.
In the BRIC countries, there has been recently slowing in economic growth; however, there will be an increase this year primarily in Brazil. China’s GDP is slowing to less than the typical 8% growth rate and 2013 and 2014 are project to show a 7.5% and 7.4% growth rate, respectively.
The biggest risks to growth are political such as incoherent fiscal and monetary policies and conflicts, fragile economic recovery, slow recapitalization by banks, reduction in consumer debt, slowing monetary stimulus, and inflation and asset bubbles (created in part by the stimulus measures).
Kirby Leong, Social Business Strategist, SAP