2010 Review, 2011 Predictions
Sital: “Mitul, as 2010 draws to a close how would you sum up the year? What have been the highs and lows from an economic viewpoint?”
Mitul: “Sital, 2010 was a tumultuous year to say the least, but the worst period for markets and economies was definitely Q2 when concerns about Europe were at their most extreme.
Market volatility and uncertainty rose significantly during this time and many were talking of an imminent break-up of Europe. Greece’s crisis shook markets but worries quickly spread over the year to other countries including Ireland, Portugal and Spain.
On the other side of the coin, economic conditions globally continued to improve even if Southern Europe suffered. 2010 was a year when there was a clear shift in growth dynamics between developed and developing countries.
Whilst the US, Japan and Europe recovered only slowly from crisis, emerging economies especially in Asia, led global economic activity and provided the high points for economic growth over the year.”
Sital: “So in a year of mixed fortunes, who would you say have been the winners and losers in 2010? “
Mitul: “The definite winners have been developing economies. China is likely to have achieved a 10% growth rate in 2010 helped by strong domestic stimulus whilst India was not far behind, growing by around 8.9%. Other developing economies including Argentina, Brazil and Turkey have also registered strong growth performances over 2010.
In contrast, the biggest losers over 2010 can be found mainly in Southern Europe, with Greece, Ireland and Spain likely to have experienced an economic contraction as their governments cut spending and raised taxes to reduce burgeoning fiscal deficits.
Other economies in the region such as Portugal and Italy also suffered. Northern Europe did better, with Germany leading growth.
In terms of asset classes, there is no doubt that commodities have performed very strongly over 2010. For instance, palladium and silver have risen by around 85% and 73%, respectively. On the currency front, the biggest gainers have been the Japanese yen, Australian dollar and Thai baht. On the other end of the spectrum the euro performed poorly over 2010 as worries about Eurozone sovereign debt intensified. Central European currencies also lost ground over the year.
It was a mixed year for equity investors depending on where you invested. North American equity markets have had a solid year whilst only selected equity markets in Europe including the UK, Germany and Sweden registered strong gains. Asian equity markets did well overall, with the exception of Chinese equities.”
Sital: “Talking of problems in Europe, how concerned should we be about the sovereign debt issues and bail-outs in countries like Greece and Ireland? Will we see more? And how does all this affect Joe Public in Europe and in other markets?”
Mitul: “The issues surrounding the sovereign debt crisis in Europe remain unresolved and this threatens to inflict further damage on markets across Europe and further afield. Attempts at trying to stem the crisis through huge bailouts for Greece and Ireland have been insufficient to prevent contagion to other parts of Europe. There is still plenty of potential for Spain, Portugal and other countries in Europe to come under further pressure.
In the meantime, the European Central Bank will help to prop up European bond markets but given the likelihood that fiscal austerity results in more pressure on growth, it will take some time before confidence improves. The main impact on Joe Public is through government belt tightening. Reduced government spending will negatively impact the economy and the jobs market with public sector jobs likely to be most vulnerable. Increased taxes will hit disposable income and spending.”
Sital: “Throughout the quarterly updates you’ve written for us in 2010, you were ‘cautiously optimistic’ about recovery. How optimistic are you about 2011?”
Mitul: “I am actually a little more optimistic about 2011. Of course there are many potential roadblocks including the potential for further bailouts in Europe, the impact of monetary tightening in China, as well as the threat of an escalation of tensions on the Korean peninsula
However, from an economic perspective the outlook is positive and although there will be some moderation in growth in Europe and Japan, the US recovery is likely to strengthen further helped by loose policy. Economies in emerging markets as a whole will slow slightly but still remain far ahead of major economies. Growth momentum will once again be led by Asia.”
Sital: “So could I ask you to stick your neck out and give me some quick 2011 predictions for a few areas?
Namely:
Economic Recovery and growth?"
Mitul: “Major economies will be led by the US, with economic growth of around 3.0% likely in 2011 helped by the recent tax and payrolls agreement from US President Obama. European growth will slow, but not sharply, to around 1.5% in 2011 whilst Japan’s growth rate will halve in 2011, but even at 1.3% growth will be above its trend rate of growth.
Asia as a whole will slow from 9.1% growth in 2010 to around 8.0% in 2011 with China’s economy slowing from 10% to a still strong 9%. India’s economy will slow slightly to 8.4% in 2011 from 8.9%. Latin American growth will slow more sharply to around 3.9% in 2011 whilst emerging European growth is set to slip to 3.8% growth in 2011 from 4.1% in 2010. Africa & Middle East GDP growth will strengthen marginally to around 4.5%.”
What about unemployment levels?
Mitul: “We should see further recovery in jobs markets globally. However, much will depend on geographical location. The divergence in growth in Europe will see Germany and other northern European countries enjoy increased jobs growth. In contrast there will be little improvement in the jobs situation in Southern Europe.
In the UK, government austerity measures will bite and limit any reduction in the unemployment rate but some jobs resilience is likely. In the US the unemployment rate will remain high for a prolonged period as those that left the jobs market re-enter in the wake of better economic conditions.
Unemployment rates will gradually decline globally but it will be slow process. In the US the unemployment rate is likely to fall to around 9.1% by the end of 2011 but this will still be high. In Europe the unemployment rate will remain roughly around 10% whilst in the UK it will decline slightly to 7.7%.
The slow pace of growth in developed economies will mean that the greater potential for jobs will be in the faster-growing economies of Asia and other emerging markets. Nonetheless, manufacturing activity has remained resilient and continues to strengthen even in developed economies whilst the service sector has also picked up. Improved business confidence and better access to credit will mean that companies will be more inclined to hire over coming months.
And the economies to watch?
Mitul: “As noted, the US economy will gain some of its former lustre as growth recovers whilst even in Europe, German growth is likely to remain solid. However, the greatest growth will be in Asia and in this respect the economies of China and India will be the ones to watch.”
Sital: “And how about some other predictions for 2011? Some quick sporting predictions!”
Mitul: “Okay – let’s give it a go!”
Sital: ”Beginning with Cricket – who will win The Ashes?
Mitul: “England, but the momentum is with Australia after they levelled the series this week”
Sital: “What about the football Champions League?”
Mitul: “Barcelona”
Sital: “And the Baseball World Series?”
Mitul: “Boston Red Sox”
Sital: “The Rugby World Cup in New Zealand?”
Mitul: “England”
Sital: “And what about Sarah Palin…… will she make it to the White House?
Mitul: “No!”
Sital: “On a more serious note, any final words, predictions or advice for 2011?”
Mitul: “2010 was a tough year, with plenty of turbulence and volatility. Even the best analysts failed to predict the blow-ups experienced over the year. 2011 will be one of recovery and further market healing.
There will be plenty of opportunities both on the jobs front and in terms of investments. Finding them will require more perseverance and patience than we have been used to over recent years but it will eventually be worth the effort.
Good Luck and Season’s Greetings.”
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Based in Hong Kong, Mitul Kotecha is Managing Director and Global Head of FX Strategy for a large European Investment Bank. You can follow Mitul’s views on the economy and financial markets at his personal blog, ‘The Econometer’
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