The recovery from the 2008-2009 recession is the slowest and most problematic of the past century, highlighted by changes in Dun & Bradstreet’s country risk ratings: 56 of the 132 countries (42.4%) rate worse than in October 2009 when the recovery started, while only 23 (17.4%) rate better. This level of downward movement is extremely unusual for a recovery and reflects the unique circumstances of this cycle versus prior recoveries. Indeed in 2012, three years into the recovery, Dun & Bradstreet downgraded 32 countries—the third highest number of downgrades in one calendar year—while only upgrading seven.
2012 was slightly more challenging than first anticipated, when global growth was predicted to be a modest 2.4%. Actual results indicate growth closer to 2%, a subdued pace by any measure. Headlines confirm the European outlook eroded throughout the year, driven by the ongoing Eurozone saga which in turn fuelled global under-performance. China’s exposure to reduced European demand resulted in the Asia/Pacific real-GDP growth forecast falling by 0.5 percentage points (pp) to 3.9%. In turn, Chinese demand for commodities declined throughout the year, impacting the growth forecasts of commodity rich countries. Given these factors, most regions ended 2012 below expected growth levels: Regional forecasts for Latin America and the Caribbean fell from 4.1% to 3.0%; Eastern Europe and Central Asia from 4.5% to 3.1%; the Middle East and North Africa from 5.1% to 4.2%; and Sub-Saharan Africa from 5.5% to 4.3%.
After the 2012 slowdown global economic growth is expected to pick up gradually through 2017. Nevertheless, growth is still expected to be lower than in the five years prior to 2008, and a number of concerns still weigh heavily on these forecasts. In a regional context, the forecasts highlight different growth patterns. The table above highlights the disparities in trends across the regions, with certain regions experiencing further slowdowns before growth approaches near-normal levels in 2017. Thus, slowdowns are anticipated in North America in 2013 and 2015, Asia/Pacific in 2016, and Latin America in 2017.
The healing process following the 2008–09 recession will continue to make slow, erratic progress over the next five years. The significant restructuring of the US private sector is a chief driver, which, according to Dun & Bradstreet’s unique data, is resulting in slowing bankruptcies across most sectors and improved payment performance. Furthermore, the boom in unconventional gas and oil in the US is driving down energy prices, boosting business confidence and supporting growth in key sectors like manufacturing.
Despite this cautious optimism a number of risks remain, namely:
Total debt levels in many developed economies have expanded considerably since 2000, with some of the worst offenders being Japan (over 630% of GDP in Q2 2012), the UK (556% of GDP in Q2 2012), and France (over 510% of GDP in Q3 2012). Germany (around 350% of GDP in Q2 2012) is one of the few OECD countries to have controlled its overall debt levels across the period.
When broken down into household, corporate, and public sector debt, a more nuanced picture emerges. Household debt is still growing in France (66.3% of GDP in Q2 2012), Italy (51.2% of GDP in Q2 2012), and Canada (91.5% of GDP in 2012). However, significant deleveraging has taken place in the US (down from a peak of 97.5% of GDP in Q2 2009 to 81.4% of GDP in Q3 2012) and the UK (down from a peak of 110.6% of GDP in Q1 2009 to 98.8% of GDP in Q3 2012). In Spain household debt has peaked and is falling slowly. In contrast, German household debt has fallen consistently since 2000 (now standing at 58.8% of GDP), and Japanese household debt has remained relatively static (76.6% of GDP).
When looking at the non-financial sector, a similarly confused picture emerges. French companies (158.2% of GDP in Q2 2012) are still building debt, while Japanese (down from 146.2% of GDP in Q2 2008 to 135.8% of GDP in Q3 2012), UK (down from 129.2% of GDP in Q4 2008 to 117.1% of GDP in Q3 2012), and Spanish (down from 198.4% of GDP in Q2 2009 to 184.4% of GDP in Q2 2012) company debt appears to have peaked in 2008-09 and is now slowly falling. German, Italian, and Canadian company debt levels have been relatively static since the crisis erupted.
However, the increase in public sector debt since 2008 is most concerning, as governments ramped up spending to boost economic growth. Furthermore, as the table below indicates, the problem is not only in advanced economies; emerging economies to a lesser extent have seen their fiscal positions worsen. As a result, government spending in many countries will remain constrained and tax levels high over the next few years as governments attempt to balance their books. That, in turn, will constrain growth in economies such as the US, where private sector restructuring has begun.
Governments and central banks have used quantitative easing (QE) policies, allied with record low interest rates. In five short years the Bank of Japan has increased total assets by 73.1%. In the US, the Federal Reserve’s assets have increased by 224.7%, while total assets of the Bank of England have risen by 301.4%. Finally, the European Central Bank’s total assets rose by 117.0%.
While debate surrounds the short-term success of such policies, longer-term unintended consequences are more concerning, including excessive risk-taking. Already, yields between high-risk bonds and US treasuries are narrowing, stock markets have boomed in many countries, speculative activity in commodity markets are keeping prices higher than fundamentals would dictate, and distortions mar the foreign currency markets. Currencies in countries using QE remain artificially weak, boosting export potential. Other countries are finding their currencies strengthening from increased capital flows, thereby weakening their export competitiveness. Importantly, exchange rate distortions are boosting “beggar-my-neighbor” trade protectionist policies, threatening global growth.
Furthermore, inward capital flows to emerging markets are creating asset bubbles fuelled by easy access to cheap credit. In Turkey domestic bank lending to the private sector has increased from 33.1% of GDP at end-Q3 2008 to 52.5% of GDP at end-Q3 2012, and Brazil has seen similar growth. These flows are further distorting existing sectoral imbalances and creating significant policy challenges for governments. For example, in the four years from end-Q3 2008 to end-Q3 2012, China’s domestic banking claims on the private sector have risen from 105.7% of GDP to 133.8% of GDP, fuelling a boom in home prices. While home prices have unravelled since early 2011 (see chart below), concerns linger that a collapse in home prices similar to that experienced in the US six years ago would have major implications for the global economy.
Finally, the Arab Spring—sparked by high levels of poverty and unemployment and exacerbated by cutbacks in government spending—has produced significant risk. These socio-economic factors could lead to similar situations in countries outside the Arab world as governments fight to rebalance their budgets while appeasing their populations. The transition to democracy is by no means certain in Egypt, Libya and Tunisia, while the civil war in Syria continues unabated. Furthermore, the situation in Lebanon, Iraq, Jordan, Algeria, and Yemen is anticipated to deteriorate over 2013. Regional stability is important in maintaining downward pressure on oil prices and global energy prices, not to mention ensuring supply-chain continuity.
With the deepest financial market in the world, a unique record of innovation, and relatively dynamic demographics for an OECD country, the US stands out among developed countries. Dun & Bradstreet estimates the US will enjoy 1-1.5 annual pp productivity growth in 2013-17. Expanding capital investment drives that optimism, growing by 4.4% year on year in Q3 2012. Capital investment in the US remains the one demand component not overshadowed by the debt crisis of 2008-09, and it continues to expand as if the country were in a normal recovery. With increasingly healthy corporate financials, the US private sector can underpin real-GDP growth of 2.7-2.9% per year in 2013-17, with some modest upside potential.
In a normal recovery cycle, the US would post real-GDP growth surpassing 3% in 2013-15. In light of pent-up demand—including demand for consumer durables— this is still a theoretical possibility. However, real-GDP growth has trended distinctly below 2.7-2.9% in the past few quarters, and Dun & Bradstreet does not expect the Federal Reserve’s forecast to be consistently met or surpassed before 2016.
A drag on growth below normal recovery will continue due to challenges in the public sector and the country’s trading partners. Negative headwinds will cut 0.5-0.7 pp from annual real-GDP growth through 2017, owing to a fiscal drag from public finances, rising taxes, and new spending cuts. The net effect will place US real-GDP growth in a 2-2.5% range for the period, with higher growth possible closer to 2017.
Negative news from overseas markets and US household deleveraging will also likely constrain growth. However, US household deleveraging will moderate, and US shale oil will also boost real-GDP growth by up to 0.3 pp annually. In 2012 and 2013, domestic production will have risen by 1 million barrels per day.
Latin America experienced regional growth of around 3% in 2012. The region will register 4% growth in 2013, owing to meager or declining growth in European economies, a struggling US recovery, and a decelerating Chinese economy. This outlook is accompanied by notable downside risks tied to currency and commodity price volatility as well as supply side shocks. Domestic risks will vary from country to country in the first half of 2013. With inflation contained, stronger domestic and external demand will keep Chile at 4.5%. Brazil’s moderate rebound will be driven by rising household consumption, higher public spending, increased foreign direct investment (FDI), and higher portfolio investment; accommodative policies are expected despite continuing price pressures. Argentina will maintain a protectionist stance as its external accounts come under pressure; business confidence, the commercial environment, trade relationships, and foreign investment will deteriorate further. Conditions are also deteriorating in Venezuela with uncertainty surrounding President Hugo Chavez’s return to the helm and doubts about the long-term survival of the ruling party without him.
Brazil should grow by an average annual rate of 4% for the next five years as the external environment rebounds; however, high crime rates, inflation, and inadequate infrastructure will continue to weigh on productivity. Meanwhile, Argentina’s 2017 outlook is less optimistic due to significant political and institutional challenges. The continued risk of expropriation and foreign currency imbalances also threaten the business environment. As such, Argentina should see annual average real-GDP growth of 3% to 3.5% between 2014 and 2017.
Monetary policies are neutral to accommodative.
Trade protectionism continues.
The risk outlook for the region depends largely on the resolution of the ongoing Eurozone crisis. Given the close economic links between the Eurozone and non-Eurozone Europe, the crisis in the common currency area will continue to influence regional and global growth over the next few years. Dun & Bradstreet expects no breakup of the Eurozone in the forecast period; on the contrary, policymakers will likely introduce much-needed reforms of the EU’s legal framework in 2013. Nevertheless, implementation risks are high (due to elections in Italy, Austria, and Germany this year). If member states and the EU cannot agree on treaty changes, the Eurozone could at least partially disintegrate in 2013-14. The region (and potentially the global economy) would consequently fall into a severe prolonged recession.
For the next few years, Dun & Bradstreet expects continued and even increased austerity measures in countries such as Greece, Italy, and Spain. France, Germany, Austria, and the Netherlands will reduce government spending and/or increase taxes in 2013 to meet deficit targets. This will weigh on the region’s growth potential and lead to a period of higher payment and credit risks. Positively, if these painful but necessary measures are not abandoned by newly elected governments, the EU implements a new fiscal framework, and the ECB continues with its supportive monetary policy (as expected), the EU should move toward trend growth after 2014. Overall, Dun & Bradstreet expects real GDP in Europe to grow by slightly less than 2% in 2014-17, after a meager expansion of only 0.5% in 2013.
Growth will be uneven.
Exchange rate volatility is likely to be an issue.
Europe’s bumpy recovery and deceleration in China will weigh on the region largely through trade for major regional economies like Russia, Ukraine, and Kazakhstan. Strong current account surpluses in energy exporting countries are set to ease in 2013. Deterioration of external balances will pressure local currencies. In some countries, particularly Kazakhstan and Russia, more flexible exchange rates and strong foreign exchange reserves will mitigate any potential economic downturn. In others, such as Ukraine, a fixed exchange rate regime coupled with high financing needs is likely to expose currency.
Oil prices, set to remain above $100 per barrel for the next four years, will support exporting economies like Kazakhstan, Azerbaijan, Uzbekistan and Turkmenistan. However, growth in Russia, a systemic regional economy, will decelerate despite high commodity prices, due to internal imbalances associated with underinvestment in non-energy sectors. Russia’s slowing growth will affect most countries in the region through trade and FDI; in addition, Kyrgyz Republic and Tajikistan may see their remittance inflows weaken. The banking sector, still overburdened with high nonperforming loans (NPLs), will continue to drag down output in Kazakhstan and Ukraine. In addition, while it moderated in 2012, inflation may rise due to global food prices and strong demand pressures, especially in energy exports. Overall, bureaucracy, rampant corruption, weak contract enforcement, and politically biased judicial systems continue to hamper the region’s trade and commercial environment. Insecurity risk will remain a concern in several countries, such as Kazakhstan and Russia.
Improved macroeconomic stability stands challenged by the slowing global environment.
Only Southeast Asian countries achieved strong domestic-led growth in 2012, while exporters across Asia were hit by European woes, sectoral imbalances in China, inflationary pressure in India, and a banking crisis in Vietnam. A shock seems unlikely; nevertheless, D&B suggests the region reorient capacity and employment away from supplying consumer items and resources to Europe and China over the next five years.
D&B forecasts imply a moderately successful search for new growth sources in 2013–17 for most low- and mid-income economies in South/Southeast Asia. New infrastructure will encourage growth, and rising disposable incomes will spur investment in services. If global arable and energy production can supply food and hydrocarbons, then demographics in Bangladesh, India, Indonesia, and the Philippines will strongly support consumption and return on capital. However, failure to mobilize tax revenues and provide security, justice, higher education, and other public goods will cap annual growth rates at 6% in India and at 4% in Pakistan. By contrast, Indonesia, Thailand, and the Philippines will have fiscal space to support growth.
Japan faces headwinds from declines in its working-age population, which shrank over 1% in 2012. Furthermore, demographic factors could sour sooner than expected elsewhere. China’s 15-to-64 population could peak in 2016 and fall thereafter. But China’s National Statistics Bureau pinpoints the turning point for the 15-to-59 population in 2012, when it declined more than 3 million. Meanwhile, the UN predicts the South Korean workforce will start to shrink and growth in Singapore and Thailand’s worker populations will be almost nil by 2017. A decline in Australia’s 35- to 54-year-olds will hurt investment if patterns in other high-income countries repeat.
China’s demographic inflection point encourages wage hikes and a re-migration of export capacity by Chinese and foreign firms to Bangladesh, Vietnam, and Indonesia. This will boost FDI outside China, despite the country’s unparalleled scale and export infrastructure. Other shocks could arise from the water-energy nexus. The region will likely increase energy consumption by 30% between 2010 and 2017; China’s will rise by 39%. Asia/Pacific will burn over 1 billion more tons of coal in 2020 than in 2010. The high demand for water from coal-fired and other thermal power generation could stress water supplies to businesses, agriculture, and households.
Flat oil prices, alongside political and security issues, will push growth in most countries lower through 2017 than in the period from 2002 to 2008. However, those emerging from conflict such as Egypt (growth will increase to 6.5% by 2017 from only 1.8% in 2012), Iraq (average annual growth of 9.5% in 2013–17), Libya (average annual growth of 7.4% in 2013–2017), and Syria (average annual growth of 6.5% in 2013–2017), will see higher growth rates in the latter period. Nevertheless, the commercial environment will remain challenging in each of these countries as political tensions persist and governments fail to address issues such as corruption and the weak legal and regulatory environment.
A quicker than expected global recovery would boost oil prices and growth across the region, but a potential military strike against Iran significantly undermines growth prospects in the short term.
Despite the hesitant global economic recovery, D&B expects the region to experience solid growth in the forecast period from 2013 to 2017. Most economies will experience average annual growth over 5%, driven by remittance, investment (particularly in the commodity sector), and export flows. One notable exception is the region’s largest economy, South Africa, where annual average growth will reach only 3.3%. Furthermore, countries such as Ghana, Kenya, Tanzania, and Uganda face severe economic challenges and slowing growth as a result of fiscal, balance of payments, and inflationary difficulties. In addition, the failure to address the weak commercial environment will ensure business risks remain high across the region during the forecast period.
Downside risks stem from significantly slower-thanexpected growth in China, curtailing investment flows and demand for exports. D&B is additionally concerned about the threat of violence spreading outside the Democratic Republic of Congo to neighboring countries as well as from radical Islamist groups in Mali: escalation in either situation will adversely impact growth in surrounding countries.
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The information contained in this publication was accurate as of press time. For the most up-to-date information on any country covered here, refer to D&B’s monthly International Risk & Payment Review. For comprehensive, in-depth coverage, refer to the relevant country’s Full Country Report. For additional resources and insight, visit www.dnb.com.