Column : The times they are a changin’
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2012's disappointing macro-outcomes however have likely sowed the seeds for better performance in 2013. Policymakers globally appear to be responding to disappointing macro-economic out-turns with increased urgency as central banks in the developed world open the monetary spigot ever wider. The US Federal Reserve is in the vanguard of this process. Under Chairman Bernanke's increasingly radical stewardship, the Fed has not only launched a third round of asset purchases—QE3—but also expanded the scale of money printing at its December policy meeting to $85 billion per month for the foreseeable future. From a little less than $3 trillion, the Fed's balance sheet should expand close to $1 trillion over the next year, flooding the world with liquidity. This should not only cap the downside risks facing the US economy but the global economy in general. Global stock markets and other risk markets should advance steadily as the tide of US dollar liquidity rises.
At its recent December policy meeting, the US Federal Reserve not only increased the scale of QE3 but it also took the revolutionary step of linking its zero interest rate policy to labour market conditions, signalling it is unlikely to start raising interest rates until the unemployment rate has fallen to 6.5%. With most estimates of the US's sustainable rate at around 6%, the Federal Reserve is attempting to convince the private sector of its commitment to create an economic boom. Assuming politicians are able to cobble together some kind of deal that ensures the economy does not plunge over the 'fiscal cliff', the Fed's radicalism should be rewarded by quickening economic growth with housing and the shale gas boom key drivers. This time next year expect the US to be growing at a brisker 3% pace.
Other central banks look set to follow the US Federal Reserve into increasingly uncharted waters in an all-out push for faster economic growth. 2013 could be the most revolutionary year in central banking for some time. As already discussed, the ECB has already crossed the intellectual Rubicon. Expect its bond-buying programme to be launched next year with a request from Spain, the most likely recipient. While less acute, the European crisis will inevitably rumble on with the parliamentary elections in Italy early next year and then in Germany in the autumn, the most obvious political flash points. Buoyant global liquidity and improving demand outside Europe however should ensure that the euro area moves out of recession by the second half of next year. Assuming Chancellor Merkel is successfully re-elected next autumn, the pace of euro area fiscal and political integration—key to the long-run resolution of the crisis—should quicken towards the end of the year.