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Schroders Economic & Strategy Viewpoint – October 2012

Zangana_Azad

US housing stirs, but economy faces tough fiscal headwind   

Is Europe turning a corner?
 

Chinese capital outflows: signs of stress, or a structural shift? .

 


Keith Wade, Chief Economist  & Strategist – Azad Zangana, European Economist – James Bilson, Economist


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            For professional investors and advisers only. This document is not suitable for retail clients.


            US housing stirs, but economy faces tough fiscal headwind

            Having been at the heart of the financial crisis, the housing market in the US is showing signs of life with starts and sales picking up significantly. Stronger residential investment and construction employment will help the recovery. However, having shrunk to a fraction of its previous size, the housing sector’s ability to impact wider GDP has been diminished. Furthermore, the upswing does not seem to have been driven by mortgage borrowing as households continue to de-leverage.

            In judging the outlook for the wider US economy we also assess the impact of the impending tightening of fiscal policy. Whilst we expect the US to avoid the fiscal cliff with a deal being achieved in Congress before year-end, we still expect a tightening of fiscal policy of 1.5% of GDP in 2013. Given recent evidence of the increased power of fiscal policy to hit growth, this will still be a significant dampener on activity.


            Is Europe turning a corner?

            European bourses have outperformed the US market over the past quarter as political tail-risk has ebbed. In the near-term, better than expected industrial production numbers should present upside surprise to forthcoming Q3 GDP data for the Germany, France, Italy and Spain. However looking further out, leading indicators of economic activity suggest a further weakness in growth heading into 2013.

            Given the recent support from the IMF to the notion that fiscal austerity is having a greater negative impact on growth than previously thought, we are surprised to see the supposedly anti-austerity French President choose to accelerate fiscal tightening in 2013. Meanwhile, Italy’s technocrat government is close to the end of its austerity programme, announcing a smaller tightening in 2013.

            The changes in policy present downside risks for our French GDP forecast, but upside for our Italian growth forecast.


            Chinese capital outflows: signs of stress, or a structural shift?

            Some investors have become concerned about the implied portfolio outflows in China. This has been exacerbated by accounting identities and a structural shift in the economy, though fears over the Chinese economy have certainly led international investors to withdraw their capital. We expect these outflows to reverse as Chinese data improves towards year-end


            Important Information: 

            For professional investors and advisers only. This document is not suitable for retail clients.

            This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Schroders has expressed its own views and opinions in this document and these may change. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.
            Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA, which is authorised and regulated by the Financial Services Authority.


            Source: ETFWorld – Schroders Quickview

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