Friday, December 31, 2010

Highlights of 2010

I couldn't possibly let 2010 end without picking some highlights from yet another momentous year for the global economy. You will be pleased to know I have managed to keep it to just five...

1) Global growth. At the start of 2010, the consensus for global growth was around 3.5%. The year looks like finishing with a result perhaps a tad over 4.5%. Not bad, all things considered. Within that overall result the surprises were, firstly, emerging market growth. The surprise wasn't that EMs were the driving force of the recovery - we knew they would be - the surprise was they look like posting around 8.5% for the year. Special mention goes to China, Brazil and India. The other surprise was the modest resurgence in consumption in the US towards the end of the year. Perhaps that reflects some deleveraging fatigue setting in in the run-up to Christmas?? That question will answered early on in 2011. We still don't expect the US consumer to become a driving force of the recovery. The labour and housing markets remain too strong a headwind. Equity markets have responded well to the improved growth outlook and survived the double-dip scare mid-year with most major markets at 2-year highs.

2) Sovereign debt issues. Some people thought we were a tad premature when about a year ago we starting talking about the need for governments with high debt and big budget deficits to start articulating their plans for fiscal consolidaton. It was the absence of such plans that saw sovereign debt in Europe become a key focus for markets throughout the year. The key lesson is there is a boundary to prudent fiscal policy, and that boundary is currently being tested. Markets have forced governments to articulate and begin implementing tough fiscal austerity plans. Arguably those plans could have been less austere had governments taken the lead earlier. At the end of the year the combined efforts of the EU/ECB and IMF are just keeping up with the isuue. Sovereign debt and fiscal policy will remain a key issue for markets in 2011 - and not just in Europe. In Europe, the issue will continue to widen into the broader topics of the survival of the Euro and EU governance.

3) The willingness of central banks to do whatever it takes to support growth was another highlight of the year. Perhaps it wasn't as much to do with supporting growth as it was to do with avoiding deflation. You know the line: its easier to stay out of deflation than it is to get out of it once you're in it. We saw QEII in the US - even though in our opinion it won't do much to cure the fundamental problem in the US which is the lack of demand. It did however help restore confidence and gave the sharemarket a bit of a boost. Fortunately that market boost has been justified by the improving data. Also the ECB continued to provide lifelines to countries in need of assistance. US 10-year Treasury's reached an historical low of just under 2.5% during the year - benefitting from deflation and double-dip fears, the old flight to quality (that's right, "quality") out of Europe, and the expected second round of asset purchases. By year-end, they had sold off considerably as the growth outlook improved and inflation expectations rose, but will likely remain low by virtue of a short-end of the yield curve that remains anchored at zero.

4) The changing world order. the withering of the power and influence of the US (and more broadly, the G7) is becoming increasingly obvious. To offset the US decline in the balancing act of global politics we are winessing the emergence of China as a genuine geo-political powerhouse. Along with that we have seen the rise in influence of the multi-lateral agencies such as the IMF. In my view, the IMF will become an increasingly important player in the new world order, but more on that next year.

5) Finally, New Zealand growth undershot even our miserly growth forecasts at the end of 2010. Sure there are weather and earthquake factors impacting, but it underlines the fact that it will remain tough going for the New Zealand economy next year. This is a non-traditional recovery. We've talked about wanting export led recoveries in the past - this time we need one. The (only) encouraging point of the GDP data out just before Christmas was the strong increase in plant and equipment investment. We contine to look to investment to drive the next stage of the NZ recovery. The interesting thing about that is that it will challenge the very reasons for New Zealand's long-term underperformance in measures such as productivity. 2011 looks like it will be quite fascinating.

Happy New Year!!!!!!!!!!!!!!!!!