The Global Economy in 2013 - 5 key economic trends

January 21st, 2013
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Contributed by: Shane Brett, Global Perspectives
2013 is set to be a pivotal year for the world economy. Seismic changes are taking place across the globe, transforming major economies as they try to recover from the Global Economic Crisis of 2008.

In this article we will examine the 5 key global economic trends shaping the World in 2013

1. US economic recovery continues

The US economy is undergoing a slow, structural recovery from the debt-fuelled expansion at the start of this century. In 2012 the US economy grew at approximately 2% - far more than the Euro Zone or UK. Recently the US has easily been the best performing Rich World economy.

Despite the recent media fixation with the “Fiscal Cliff” and fear of the forthcoming debt ceiling negotiations, the long term is outlook for the US economy is broadly positive.

The housing market has stabilised and consumer confidence is slowly returning. The political instability of 2012 has been resolved by Barack Obama’s decisive election win. There is now certainty that Obama will be President for the next four years. Spending will increase on health as “Obamacare” becomes the established law of the land and the country gears up for its implementation

In 2013 the US will continue its astonishing windfall of cheap domestic energy. The US will start to seriously expand its exploration of Shale Oil. The Shale Gas story is well known. What is newer is the use of the same “fracking” technology to access colossal reserves of untapped oil in Texas (and especially) in North Dakota.

This year will see a relocation of energy intensive industries from around the world to the US, to take advantage of far cheaper gas prices (e.g. Gas in Japan is four times as expensive). This will result in trade disputes with its allies who will resent having important parts of their heavy industry move to America, while they are trying to come out of recession.

Short term the effects of on-going budgetary and debt ceiling crises in Washington may be uncertain, unpleasant and unhelpful, especially to an economy still in recovery mode. The fact that the unemployment rate is still so high and there is a general fear of economic fragility, underlines the scale of the 2008 economic crisis. The big unknown for the US is how the effects of massive money printing (Quantitative Easing) will affect the economy in the years ahead. Currency volatility is virtually guaranteed.

However the panic around the Fiscal Cliff or Debt Ceiling negotiations masks more important underlying economic trends. In a world of future escalating commodity prices the US is in the enviable position of being food (and potentially) energy independent. Crucially, it has a solid future demographic structure, with a young growing population. It also remains the world centre for economic creativity and new business start-ups.

Most of the world would be happy to have America’s problems.

2. Chinese Infrastructural Expansion

China is set to ramp up infrastructural spending in 2013. It will spend over 1Trillion Yuan (approx $157 billion) this year. This should provide a boost to the world economy (even if this spending is unsustainable).

The nature of China’s One-party system means that large infrastructural projects can be approved and implemented quickly. China is increasing infrastructural spending in an attempt to provide a soft landing for its economy, battered by faltering exports, a bursting property bubble and rampant wage price inflation.

The key point for China this year is whether this infrastructural spending will be wasted on empty airports and unused highways, or if it will be used to modernize the country and lay the foundations for a solid future economy.
Transportation, electricity and other similar infrastructure developments (e.g. road construction & port expansion) will be the major cornerstone of China spending 2013.

The expansion of the Chinese electricity network will push up Copper prices. The government is planning to upgrade the electricity network for 500 million people – larger than the entire United States grid. The government is also planning to extend its high speed train network to a large number of second-tier domestic cities, in an attempt to drive growth and more even economic development. It is also building a huge number of nuclear plants around the country, to wean itself off filthy coal fired electricity plants.

Globally Chinese companies are starting to bid more aggressively for both US companies and domestic American contracts. This will be a cause of friction for the two countries over the next few years. The expansion of Chinese domestic infrastructural spending should be good news for commodity dependent economies like Canada and South Africa, even if the scale of its spending is far smaller than the stimulus of 2008 and its level of on-going infrastructural spending is unsustainable in the long run and will bring diminishing economic returns.

China is also facing a host of other problems across its economy and society (e.g. banking bad debts, an unhappy middle class, a choppy political leadership changeover and tension with its neighbours.

These issues will be examined in detail in the forthcoming Global Perspectives White Paper – “China on a Knife edge”.

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