Investors should be sanguine

Developed countries are continuing to drag on growth, although even the emerging markets of China, India and Latin America are beginning to have issues of their own.

As we near the end of the first quarter the UK has seen a downgrade on its sovereign debt by Moody’s while the apparent path to recovery in the US is under pressure following a last minute fudge on the fiscal cliff at the start of the year and the lack of agreement to avoid the sequestration programme of spending cuts kicking in on March 1.

The downgrade of the UK follows in the wake of a downgrade of the US in August 2011 and France in November 2012, but neither appeared to significantly affect economic growth.

In fact US annual GDP increased in 2012 to 2.2 per cent compared with 1.8 per cent in 2011, suggesting the downgrade had a minimal impact. However the US sequestration, combined with the tax rises in the fiscal cliff agreement, is likely to have more of an effect.

The IMF notes that the sequestration means it will have to “re-evaluate our growth forecast in the US and also our other forecasts”.

It adds the event would also have spillover effects, depending on how aggressively sequestration is implemented, but notes there will be an impact on global growth, with the countries with the most active trade relations being most affected.

European growth continues to stagnate with latest GDP projections from the Organisation for Economic Co-operation and Development (OECD) suggesting the euro area would see a contraction of 0.1 per cent in 2013 before pushing into positive territory with 1.3 per cent growth in 2014.

The emerging markets are expected to fare better, in spite of high inflation in countries such as India where annual CPI reached 9.3 per cent in 2012, with both China and India forecast to see an increase in GDP growth in 2013 following a dip in 2012. But the OECD notes that countries such as China and India can do more to boost growth.

Elsewhere Japan recorded 1.7 per cent GDP growth in 2012, up from a contraction of 0.7 per cent the previous year, with the significant improvement attributable in part to the reconstruction phase in the wake of the March 2011 earthquake and tsunami.

This growth is forecast to slow in 2013 and 2014, according to the OECD, but following the election of Shinzo Abe as prime minister in December 2012 the outlook for the country could change.

Although economic growth is seen to have limited impact on market performance, it does weigh on investors’ minds and can contribute to a risk-on or risk-off environment. With economic growth looking reasonably slow and steady, investors should be relatively sanguine, at least for now.

Nyree Stewart is deputy features editor at Investment Adviser