Will 2013 be the year when the global economy finally emerges from the shadows of the financial crisis? The World Bank and the International Monetary Fund certainly don’t think so. Both of them have forecast a very modest increase in the growth of the world economy this year.
Equity markets, however, have been celebrating the new year. To a large extent, this is the result of a lowering of risks in the global economy. The worst fears about the euro zone have receded, largely because of monetary easing measures taken by the European Central Bank.
It’s no coincidence that the MSCI Greece index is up 20% in the last three months and demand for Spain’s recent 10-year bond issue has been unprecedentedly high.
The US fiscal cliff now appears to have been little more than a hump and the S&P 500 has hit a five-year closing high, while the VIX, a measure of volatility, is near a five-year low. Other parts of the world too seem to be bouncing off a bottom, with both China and India expected to see higher growth. In India, momentum has come back with a series of reform measures that have dispelled the gloom induced by an inexplicable bout of policy paralysis. The list of initiatives taken in the last three months has been quite impressive and foreign institutional investors have responded enthusiastically, pumping in record amounts of net inflows this month. After a long time, emerging market investors have a small overweight on India.
Does it mean then that the worst is behind us? Not necessarily. After all, markets had run up early last year as well, only for hopes to be dashed later. The confidence regained in Europe is fragile and could easily be shattered.
Both the World Bank and the IMF say that growth in the US will be lower this year than in 2012 because of fiscal cuts. And there are plenty of dissenting voices that believe Chinese growth is likely to be much lower in future.
At home, the finance minister has put his finger on what could be the biggest risk for the markets this year. At an investors meeting in Singapore, he said that the biggest threat he sees to reforms is an unstable government after the 2014 Lok Sabha election. Investors will be closely watching the results of several state elections due this year and the political outlook will weigh heavily on the markets in the second half of the year.
In short, much depends on whether the green shoots seen both in the Indian and global economy are tended well enough to mature and deliver growth. As IMF managing director Christine Lagarde put it, 2013 will be a make-or-break year.
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