By Shane Brett

2013 is set to be a pivotal year for the world economy. Seismic changes are taking place across the globe, transforming major economies as they try to recover from the global economic crisis of 2008.

In this white paper we will examine the 5 key global economic trends shaping the world in 2013:

1. US Economic Recovery Continues

The US economy is undergoing a slow, structural recovery from the debt-fueled expansion at the start of this century. In 2012 the US economy grew at approximately 2% — far more than the Euro Zone or UK. Recently the US has easily been the best performing rich world economy.

• Despite the recent media fixation with the Fiscal Cliff and fear of the forthcoming debt ceiling negotiations, the long term is outlook for the US economy is broadly positive.
• The housing market has stabilized and consumer confidence is slowly returning. The political instability of 2012 has been resolved by Barack Obama’s decisive election win. There is now certainty that Obama will be President for the next four years. Spending will increase on health as Obamacare becomes the established law of the land and the country gears up for its implementation

• In 2013 the US will continue its astonishing windfall of cheap domestic energy. The US will start to seriously expand its exploration of Shale Oil. The Shale Gas story is well known. What is newer is the use of the same fracking technology to access colossal reserves of untapped oil in Texas (and especially) in North Dakota.
• This year will see a relocation of energy intensive industries from around the world to the US, to take advantage of far cheaper gas prices (e.g. Gas in Japan is four times as expensive). This will result in trade disputes with its allies who will resent having important parts of their heavy industry move to America, while they are trying to come out of recession.
• Short term the effects of on-going budgetary and debt ceiling crises in Washington may be uncertain, unpleasant and unhelpful, especially to an economy still in recovery mode. The fact that the unemployment rate is still so high and there is a general fear of economic fragility, underlines the scale of the 2008 economic crisis. The big unknown for the US is how the effects of massive money printing (Quantitative Easing) will affect the economy in the years ahead. Currency volatility is virtually guaranteed.
• However the panic around the Fiscal Cliff or Debt Ceiling negotiations masks more important underlying economic trends. In a world of future escalating commodity prices the US is in the enviable position of being food (and potentially) energy independent. Crucially, it has a solid future demographic structure, with a young growing population. It also remains the world center for economic creativity and new business start-ups.
• Most of the world would be happy to have America’s problems.

2. Chinese Infrastructural Expansion

3. German Election Dominates Europe

• In the European Union, the German election in September will completely dominate the year in Europe. The largest trading block in history will continue its incremental approach to the Euro Zone crisis. Angela Merkel will be seeking re-election and is keen not to upset the electorate by being seen to commit the German purse to further economic bailouts.
• To date she has done an excellent job of disguising from her electorate both the true scale of the crisis and the size of the check Germany needs to write to hold the Euro Zone together.
• Consequently prior to the election little substantive progress will be made in ending the Euro Zone Crisis prior to the election. Gradual reforms around the appointment of a Euro Zone Banking Supervisor will take place, but attempts to agree a cross-border deposit guarantee are unlikely to get far. Most importantly any attempt to move towards debt mutualization (i.e. where the Euro zone countries jointly issue and guarantee debt) will be swiftly and firmly rejected.
• Joint Euro Zone debt would drive up the cost of German borrowing and force it to properly backstop basket cases like Greece. Despite a gradual German realization that long-term debt mutualization will be required; it is not a policy that Merkel can sell to the German people this year.
• This means 2013 may bring disappointment to peripheral bail out countries like Ireland and Portugal who are faithfully implementing austerity packages. These countries hope to get a Greek style debt write off in the near future. Besides some opaque tinkering with Ireland’s Promissory Notes, they will likely to wait until after the German election for any significant relief.
• The main economies of Europe will teeter between zero growth and recession. Political crises will flare up in both Italy and Spain, while the UK will agree to hold some sort of referendum loosening its ties to the European Union. A major EU member has never done this before. It could have a huge effect on the future of the European continent.

4. Global Currency Volatility

• The effects of widespread money creation (i.e. Quantitative Easing or QE) by the Developed World’s Central Banks have not been fully appreciated. This is the year these effects will slowly start to manifest themselves in the World economy. This will be represented by more widespread currency volatility.
• The US Dollar and Euro may weaken significantly this year, or be subject to far more volatile exchange rate movements. The Australian Dollar in particular is laughably overvalued. Though the Aussie currency may remain strong for some time (if China continues its slow recovery), it is the most overvalued currency in the world now that its commodity export boom is subsiding, its domestic economy slowing and interest rates are on the way down.
• The Chinese Renminbi will continue to strengthen, staying at the upper end of its permitted trading band for the foreseeable future. This may give the US Dollar and Euro some breathing space and lessen talk of currency manipulation in Washington.
• The Euro, however, will remain volatile. The ECB engaged in massive money creation in late 2011 early 2012 (its LTRO operations). This 3 year program will have to be repaid at the end of next year and it will interesting to see what effects this has on banking industry in the Euro Zone. A flare up of the Euro Zone crisis (perhaps due to a Spanish or Italian bailout or re-election crisis) will see the value of the single currency quickly plummet.
• Finally while QE has prevented a very deep recession, it is important to note that this level of money creation is unprecedented and its outcome largely unknown. Historically from Rome and Byzantium in the 3rd and 10th Centuries, to Weimar and Zimbabwe in the 20th and 21st Centuries, massive currency debasement has always been a predecessor to high inflation and economic decline.
• It seems likely that inflation will indeed start to rise in the years ahead as more money chases the same amount of goods. This was always the intention of the United States.

It is the only realistic way it can to devalue in real terms the size of its gigantic national debt.

5. Commodities Prices Begin to Escalate