Q4 2013 Outlook: Destined for global growth slow down

With or without the support of further quantitative easing from the major central banks, global growth is headed for a slowdown, say Saxo Bank’s analysts in the Bank’s financial outlook for Q4. They don’t expect a sustainable comeback for growth until policymakers stop supporting the parts of the economy that don’t need or deserve support and start supporting the most important engine of job and economic growth: small and medium-sized enterprises (SMEs).

With the intensifying need to reset interest rate expectations after the Fed’s non-tapering of its asset-buying programme, there is a perfect storm brewing on the economic horizon. This would be good news, Saxo Bank pointed out in the Quarterly Outlook published on 8 October. The only way to stop the unprecedented monetary experiment is for it to fail to show that it is generating what should always be the number one priority: more jobs and rising incomes.

Saxo Bank argues that a weak economy and in particular the struggling labour market will force the Fed’s hand, and instead of tapering it will have to increase its QE next year as the economy is too weak to weather a pullback in Fed support. As the markets adjust to the prospect of more QE rather than less, we may see another bout of hope that extend and pretend will continue to pump asset valuations ever higher. However, further ahead, likely sometime early in 2014, the QE cycle – or at least the markets response to it – will begin to falter as Fed policy will increasingly risk losing credibility. In the end, all major historic shifts in policy have only come as a result of massive stock market declines or unemployment rates becoming too high and painful to ignore. In other words, QE will only be threatened as a policy tool when the markets roundly reject it, rather than celebrating it.
Steen Jakobsen, Chief Economist, Saxo Bank, comments: “The global economy is running on empty. 2014 will see a bigger discussion on what is the real exit strategy from the current ‘extend and pretend’. Right now the market only sees two paths: Inflating the economy to reduce the burden of debt, or writing off the debt between treasuries and central banks.But I believe there is a third way: A repeat of the 1940s - the last time fed was this involved in so-called helping the market. Back then, the Fed got saved by disinflation and a recession brought on by the very same policy which today slows the path towards recovery too much easy money. History is about to repeat itself only because we fail to learn and to embrace the need for change”

Saxo Bank advises to prepare for a good start to Q4, but for headwinds in asset markets to build as we roll in to 2014. Steen Jakobsen added: “2014 will be the year to clean up and prepare for a world that is increasingly more balanced, less leveraged and more proactively helping the one part of the economy we have kept outside the loop throughout this cycle: the SME.”