With Christmas and New Year cheer and optimism still bubbling away for most of us we now need to turn our attention to the major risk factors that are likely to impact upon the world economy and financial markets during 2013. While the world economy is estimated to have grown by over 3 percent in 2012 overall and has enjoyed such a remarkable escape from the paralysis affecting some of its constituents like Europe, a major issue is whether this stable growth trajectory will continue for the foreseeable future. At the end of the day the global stock market has been a secular bear market for over a decade and we are now at the juncture of ascertaining whether the bear will have its final growl in 2013 or we will enter a new market phase.
The economic fundamentals are very strong for world economic growth, thanks to a relatively soft landing for China. However, a number of world risk factors prevail that could upset the world’s economic and financial stability. The major risk factor emanates from the global bond market where yields have been driven down to historic lows on both sides of the Atlantic due to Quantitative Easing [QE] or the printing of money. This has had a knock on effect in emerging markets, through the interest rate parity mechanism and emerging economy sovereign debt yields are also historically very low, despite their high level of political risk and this may be why emerging economies outperformed the world’s average GDP growth by around 2 percent because of lower financing costs.
Global risk emanates from the northern hemisphere, in particular the EU and US but these can wreak havoc elsewhere. Europe is still a major issue in terms of world economic fortunes and 2013 will be a make or break year for them in terms of the single currency that necessitates closer banking and political union. Already, the UK is hinting of the need for a tiered system of membership to exist, which although critics describe as a ‘two speed EU’, would allow banking, monetary and political union to move forward at a faster rate. For would-be contenders on the European continent this could boost the viability of the Eurozone, whilst keeping the rationale of a strong Europe intact and expand the free trade area without leaving anybody out. This consensus has been gathering momentum in recent months and would certainly fortify the global institutional framework and contribute to a more stable world economic growth.