Road to Recovery
by Kathleen Hughes, Head of Global Liquidity Management Sales, and Jason Granet, Head of International Liquidity Portfolio Management for Global Liquidity Management, Goldman Sachs Asset Management
The global recovery has faced many challenges over the past year, and heading into 2012 the dominant issues are yet to be resolved. Global growth remains sluggish and the situation in the Eurozone has become more pressing. At the same time, however, support for the recovery has never been stronger. Kathleen Hughes and Jason Granet of the Goldman Sachs Asset Management (GSAM) Global Liquidity Management team, discuss these developments and the potential implications for investment in the year ahead.
This time last year the global recovery looked in good shape, but by the end of the first quarter it had hit serious challenges. Do you expect growth to improve much this year?
Our outlook is for slower global growth in 2012, with a wide disparity between developed and emerging economies.
If we focus on the world’s largest economy, the outlook is generally benign. US growth picked up notably in the fourth quarter, to 2.8%, and we expect a pace close to trend in 2012. Manufacturing data point to continued expansion, unemployment has declined, slowly, from a peak of 10% in October 2009 to 8.5% as of end-2011. We’ve also seen stabilisation in the housing market, and we expect a slow and gradual recovery.
In terms of global growth, the bulk is still generated by the developing world. For example, though China’s growth has slowed, it was still running above consensus at 8.9% in the fourth quarter, and we believe that policymakers will provide sufficient stimulus to keep the pace around 7.5% for 2012.
As was the case last year, the Eurozone’s sovereign debt crisis is the dominant risk to the global economy and markets. While we don’t expect the global recovery to be derailed by events in Europe, we believe the risks have intensified as the crisis has evolved. Where before the focus was on the peripheries, today the largest economies are also showing signs of strain. We now see a higher risk of recession for the Eurozone, with possible implications for its neighbours, though we believe the UK will probably scrape through with positive growth this year.
How does this heightened risk scenario factor into your outlook for global interest rates?
In contrast with the situation a year ago, we think monetary policy globally is biased towards easing for the foreseeable future.
This isn’t your traditional policy easing, though, where policymakers deliver stimulus by cutting interest rates. Three key factors have helped reshape the policy environment: 1) the recovery in the developed world is still shaky; 2) governments are under pressure to correct large deficits and reduce debt, and so are less able to boost growth via spending; and 3) interest rates in the largest economies are already close to zero. As a result, central banks in the US, Eurozone, UK and Japan are resorting to increasingly innovative ways to support their economies, from quantitative easing (asset purchase programmes) to extraordinary liquidity measures such as the European Central Bank’s three-year loans. We anticipate more of this style of easing in 2012.
In the developing world, central banks have more leeway to use traditional policy tools, as interest rates are high enough to cut substantially, and slowing growth has helped bring inflation pressures down. Brazil and China have led the shift from a tightening bias at the start of 2011: Brazil made the first of a series of cuts in August, when its policy rate was 12.5%, and the People’s Bank of China started lowering its reserve requirement ratio late last year to allow commercial banks to lend more money. We expect to see more stimulus in the year ahead.