FINANCIAL ICEBERG

Always consider hidden risks

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CHARTS

World in Recession ?

( From CPB, Financial Sense, Recession Alert, IMF )

Global World Trade Volume and Industrial Production

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Given the historical relationship between cross-border trade and global economic activity, report from the Netherlands Bureau for Economic Policy Analysis that world trade volumes seem to be consolidating but are within a hair's breadth of turning negative on a year-over-year basis suggests that another global downturn is on the cards. ​Weak economic data from Europe, China, Japan and the U.S. reinforced fears of a deeper global downturn.​Europe's troubles continued to hit exporters around the world.

Conclusion

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"More than ever, the economic outlook hinges upon the actions taken or not taken by governments and central banks".

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​ Nouriel Roubini warned on last week that certain key developments would exacerbate the downside risks to global growth in 2013.



"Until now, the recessionary fiscal drag has been concentrated in the euro zone periphery and the U.K.. But now it is permeating the euro zone's core," Roubini wrote. "And in the U.S., even if President Barack Obama and the Republicans in Congress agree on a budget plan that avoids the looming "fiscal cliff," spending cuts and tax increases will invariably lead to some drag on growth in 2013 – at least 1 percent of GDP."



​​ Policy Action Is Needed to Secure the Fragile Global Recovery. Most advanced economies face two challenges. First, they need steady and sustained fiscal consolidation. Second, financial sector reform must continue to decrease risks in the financial system. Addressing these challenges will support recovery and reduce downside risks.



So what will be difficult in 2013 to call for a recession or not, is that slower growth at the beginning of the year ( compare to 2012 as a whole ) will bring indicators flirting constantly​​ with recession calls. But I think that we will avoid it...

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So according to those two traditional definitions of recession, the world economy is already starting to be in...



​​Countries in “recession” for the 18 countries we have data for so far in 4Q are: Austria, Belgium, Czech Republic, France, Germany, Hungary, Italy, Japan, Netherlands, Portugal, Spain, Greece, U.S and UK.







World Economic Outlook Update ( from IMF )



Gradual Upturn in Global Growth During 2013

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​Global growth is projected to increase during 2013, as the factors underlying soft global activity are expected to subside. However, this upturn is projected to be more gradual than in the October 2012 World Economic Outlook (WEO) projections.



​​Policy actions have lowered acute crisis risks in the euro area and the United States. But in the euro area, the return to recovery after a protracted contraction is delayed. While Japan has slid into recession, stimulus is expected to boost growth in the near term. At the same time, policies have supported a modest growth pickup in some emerging market economies, although others continue to struggle with weak external demand and domestic bottlenecks.



​​ If crisis risks do not materialize and financial conditions continue to improve, global growth could be stronger than projected. However, downside risks remain significant, including renewed setbacks in the euro area and risks of excessive near-term fiscal consolidation in the United States. Policy action must urgently address these risks.









The global economy is likely to be stuck in the "twilight zone" of sluggish growth in 2013, but if policymakers fail to act, it could get a lot worse. So the real question is : Is the World Economy in recession or not ? We will take a broad view with two different approach. One with traditional defined technical recession indicator, and the other, a pure real economic index pulse ( Trade Volume and Industrial Production ).



Let s start with the first one : a traditional recession indicator...​​



Traditional Recession Indicator​​



For the traditional indicator, he is defined by the major ​41 OECD countries across the globe with each country receiving equal weightings.

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There is two definitions of technical recession :

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1) ​​either the presence of a single negative quarter-on-quarter growth so that 60% level seems to be a viable threshold for the definition of “global recession” (black)

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2) ​ or the more traditional two consecutive negative quarterly growths and the 70% level is probably the appropriate threshold for the 2-quarter definition (blue).

( See graph below )​





2. World industrial production



According to preliminary data, world industrial production went up 0.6% in December, following a revised 0.5% increase in November. Production growth weakened in emerging economies as a whole, but it went up in advanced economies, mainly as a result of positive turnarounds in Japan and the Euro Area.

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Because of the volatility of monthly trade figures, momentum is the preferred measure of trade growth ( Momentum is the change in the three months average up to the report month relative to the average of the preceding three months ).



​​ Global production momentum increased from 0.2% (non-annualized) in November to 0.8% in December. Momentum became less negative in advanced economies and went up further in emerging economies. The growth gap between the two groups of countries remained large. ( See graph below )

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1. World merchandise trade volume



​​Based on preliminary data, the volume of world trade decreased 0.5% in December from the previous month, following a revised 0.7% increase in November. Import and export volumes contracted in advanced economies, while they expanded in emerging economies. In the Euro Area, both imports and exports slumped.

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Because of the volatility of monthly trade figures, momentum is the preferred measure of trade growth ( Momentum is the change in the three months average up to the report month relative to the average of the preceding three months ).



​​Fourth quarter trade growth was 0.9% (non-annualized), while momentum, which is the same measure of growth, was 1.0% in November. Momentum in emerging economies remained elevated − at its highest level since early 2011 − while in advanced economies it remained negative. ( See graph below ) ​

So based on those indicators, we are going through a very slow growth period but not yet in the recessionary level...