The World Economy’s Quarter-Point Quagmire
As widely signaled in Managing Director speeches, the IMF clipped its emerging and developing economy 2013 GDP growth forecast 0.3 percent to just below 5 percent on a “stark tradeoff” ahead between policies to boost activity and staunch capital outflows. The “disappointment” also was due to infrastructure, commodity and credit problems amid continued weak external demand although the Japan outlook improved and the US Federal Reserve may modify its zero interest rate stance as the ECB reaffirmed a “low for long” one. All the BRICs were downgraded and Sub-Sahara Africa was shaved half a percent after previously staying intact, as Nigeria and South Africa were cited for “struggles” with the latter cut to 2.5 percent, half the regional average. Despite gold at multi-year lows and 25 percent unemployment, miners there are agitating for double-digit wage hikes and the banking system long considered a stability bulwark was singled out for uncollateralized lending risks in a recent Moody’s report. Inflation may be reverting to the target range in the absence of electricity tariff rises but monetary easing is off the table with the rand’s drop to the 10/dollar handle as the 6 percent of GDP current account deficit persists. State telecoms operator Transnet has spotted a market opening with foreign investor pure sovereign aversion but global corporate bond issuance and liquidity has disappeared amid continuing dedicated fund outflows and strapped dealer capacity under US and European regulatory constraints. The New York-based trade association EMTA has criticized shrunken capacity under Dodd-Frank rules even as it managed to keep currency NDF derivatives from mandatory transfer to clearinghouses. In Europe, where “naked” sovereign CDS holding is already banned, another battle on that front was instigated with anti-monopoly proceedings against major players including Markit and the swap professional body ISDA. Short-selling curbs mainly on bank equities however are due to be removed, but the timetable may be delayed with slow progress toward unified bank supervision treatment. A depositor and creditor hierarchy has been outlined that will spare small savers post-Cyprus but does not go into effect until 2018. France and Germany remain at odds over central and national supervisor supremacy and the trans-Atlantic financial services muddle is compounded by initial exclusion from free-trade zone negotiations just launched with an end-2014 target deadline.
The Eurozone should creep out of recession this year on after-tax inflation under 1 percent and deflation in Greece and other squeezed periphery members. The ECB’s price stability mandate assigns it a countervailing role but even its unconventional tools have not prevented the phenomenon which can last for decades as in the Japanese experience. Sovereign debt repayment becomes more onerous under this scenario, and although the Troika has agreed to release the next partial tranche on further public sector cutback plans outright official forgiveness may soon present an unavoidable escape path.
