Global Overview: September 2012
Thomas White International
October 19, 2012
Aggressive central bank actions lift sentiment
Aggressive policy action by the U.S. Federal Reserve and the European Central Bank (ECB) helped lift investor sentiment further in September, even as economic signals from across the world continued to be jaded. The Fed has committed to buy mortgage backed securities and keep interest rates low until U.S. economic growth becomes more vigorous and the unemployment rate declines to more comfortable levels. On its part, the ECB has offered to extend unlimited buying support for debt issued by the troubled European countries, provided these countries commit to fiscal targets. The establishment of the European Stability Mechanism, the region’s permanent financial rescue fund, is expected to make available additional resources to support the countries that are facing difficulties as well as the banks in need of enhancing their capital base.
Global equity prices reacted positively to the policy measures and ended September with strong gains that helped erase the second quarter’s decline. Emerging markets also bounced back strongly, after underperforming in earlier months, as the continuation of low interest rates in the developed world is expected to drive additional investment flows into assets such as emerging market equities. However, data from most major economies remained uninspiring and, as a result, global growth forecasts have been lowered for the current year as well as the next. Factory output continued to fall across Europe, as the emerging economies in the region’s periphery suffer from weak demand from their developed neighbors. In the U.S., where the housing sector is seeing healthier signals, manufacturing expanded in September after declining for the previous two months. Among the emerging markets, China, Korea, Brazil, and South Africa reported further falls in factory activity, while it expanded in India, Indonesia, Russia, and Mexico.
Differing credit growth trends among countries reflect a dual pace in global growth
One of the major factors that has restricted the pace of the global recovery since 2009 has been the slower than anticipated improvement in bank credit across most of the developed countries. The severity of the 2008 financial crisis and heightened watchfulness by regulators encouraged banks to reduce the size of their balance sheets. At the same time, they became more wary of expanding their loan books and kept credit standards tight. In addition, most global banks actively tried to reduce their exposure to countries facing deep economic and fiscal stress. This trend has been very evident in Europe, where credit availability in the healthier economies remains appreciably better than the weaker countries such as Greece, Spain, and Portugal. In emerging economies, credit growth has moderated since last year after the strong rebound during 2009 and 2010. Nevertheless, credit demand growth in most large emerging countries continues to be healthy and central banks have been easing reserve ratios to encourage bank lending.
Metal producers face challenging demand outlook
The moderation in global growth has dampened the demand outlook for most industrial metals, despite the prospect of increased spending by the large emerging economies on infrastructure and other construction. The World Steel Association, which represents the major global steel producers, expects steel demand to slump this year from average growth of nearly 10 percent over the previous two years. Though global steel demand is likely to improve next year, the rate of growth is expected to be only 3 percent. Most markets now have excess steel supplies and producers are scaling back output or even idling plants, especially in Europe. Manufacturers in emerging economies are also treading slowing on capacity additions and projects announced in recent years have been deferred. While the appreciable fall in iron ore prices will likely provide some respite, most global steel manufacturers are expected to face margin pressures.
Unlike steel and copper prices that soared over the last decade, aluminum prices have hardly changed despite the growing demand and popularity of the metal. Capacity additions by aluminum manufacturers, especially in China, have outpaced demand growth and have kept prices subdued. In addition, the requirement for large quantities of cheap electricity in aluminum production has hurt industry profitability. In contrast, copper producers have been highly profitable in recent years and the outlook for the metal remains relatively better when compared to steel and aluminum. Though copper prices have come down from the highs touched during last year, they are still close to the pre-financial crisis levels. However, supplies may increase as new mines such as the Oyu Tolgoi mine in Mongolia go on stream and dampen prices.
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