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Wrapping up the year

Dr Shane Oliver Head of Investment Strategy and Chief Economist, AMP Capital

As we prepare to wrap up 2013, it looks likely to turn out to be a good year. Equity markets have rallied, the US is on a path to recovery despite all the political squabbling, China did not land hard and the euro did not break up. Below is a summary of what’s been working for this year’s big economic news stories.

The US and quantitative easing

Discussions surrounding stimulus have taken many twists and turns, from the need for greater amounts of stimulus to concerns that all the money printed by central banks in the US, Europe and Japan would result in a sharp rise in inflation in developed economies. What has not occurred are high levels of inflation. In fact over the last couple of years inflation has been falling with the US, Europe, Japan and Canada all having inflation rates of 1% or less. What has occurred is that the US economy is on track for a recovery, albeit slowly, and stimulus from the Federal Reserve has played an important role.

The US housing sector (the trigger of the global financial crisis) continues to show signs of recovering. Private sector deleveraging is well advanced. Private debt is down and household wealth levels are up.


It seems that concerns surrounding China periodically come in and out of fashion. At the core of these worries are structural issues such as: China’s investment-driven growth model is unstable, the housing sector is overheated, the economy has lost its competitiveness or that China has taken on too much debt. However, these worries have been overdone. There is no doubt that the slowdown in China’s growth rate since 2010’ high’s, peaking at +12%, has unnerved investors.

But growth does seem to be stabilising around a still strong 7.5% pace for the year.

At the same time, China’s leaders have taken steps to guide the world’s most populous nation away from debt-driven investment in infrastructure and real estate towards a more sustainable path.

As this occurs, and if China removes some red tape barriers, it could facilitate outward investment which could represent opportunities for the US and Australia. However, China is likely to progress cautiously and slowly.


While European debt woes have been covered ad nauseam, the most intense period of the Eurozone crisis is likely behind us, risks continue to fade and growth is gradually returning.

Germany has been the main source of strength, but peripheral countries are also heading in the right direction.

The Greek budget is on track for a primary surplus this year and Moody’s has upgraded its credit rating—albeit from low levels. Spain managed to exit its recession. Spain’s real gross domestic product (GDP) expanded by 0.1% for the September quarter. However, Spain’s economy has contracted by -1.2 % in the past year. Nevertheless, data signals that the economic recovery remains very gradual at this stage as many structural factures remain to be addressed and euro-wide unemployment remains at elevated levels of around 12%. With inflation at just 0.9% the European Central Bank has plenty of flexibility to provide further stimulus.


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