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Outlook 2013: gradual growth recovery under way

Markets are normalizing after the ECB's OMT announcement

Global GDP expected to grow about 3.5%. Euro area by 0.1%

Italy to exit the recession in spring

Risks remain, but they have started to shift away from the Eurozone


UniCredit's Research Department, led by Global Chief Economist Erik F. Nielsen, presented today its  Outlook 2013 report.


UniCredit reaffirms its fundamental outlook: markets are normalizing and global growth is slowly coming back, including in Europe. But risks remain.


"‪We are entering 2013 extremely bullish on markets. The great risk normalization process, which started last summer, is still in its early stage, and if growth recovers just moderately, as widely expected, the constructive markets are likely to be with us for at least 6-9 months more" Nielsen comments.


In 2013, UniCredit's Research Team foresees global GDP growth of about 3.5%. Asia (excluding Japan) and the US should help return global trade to more traditional growth rates. In the Eurozone, bank's economists expect a more modest recovery and forecast 0.1% GDP growth. In addition to accelerating exports, less fiscal drag and easier monetary conditions will help end the present recession. Activity is seen stabilizing in the first months of the year, with annualized growth at about 1.2% towards the end of 2013. This includes a return to (marginal) quarterly growth in Italy and Spain around mid-year, although in yearly average terms GDP will remain negative in both countries (-0.7% in Italy and -1.4% in Spain).


UniCredit's Research Team thinks that 2013 will be characterized by a continuation of the great normalization process for asset allocation, as investors continue their gradual return back to a more appropriate level of risk.


The normalization process started with the ECB's introduction in early August of the OMT (Outright Monetary Transactions), made credible by the support of the German government. It includes a narrowing of Eurozone peripheral spreads, buying of emerging markets assets (including CEE), as well as credits and equities.


The length and precise composition of such expected rally will largely depend on the speed and distribution of the global growth recovery, as well as on the effectiveness of policy actions. It holds the potential to overshoot (maybe towards the end of 2013) as ample liquidity finds its way into financial assets. But UniCredit Research Team is firmly convinced that general Eurozone-wide inflation remains an extremely low risk for the foreseeable future. The output gap is too great and the bank lending channel too impaired to generate pressure on prices. Hence, UniCredit's economists continue to doubt that demand for protection against inflation will rise dramatically.


The short-term risk to the global outlook - and to assets - has shifted away from Europe (courtesy of the OMT) to the US, where the debt ceiling and spending cuts represent the next big challenges. Tensions in the Middle East and ongoing tensions between various Asia countries also imply some risk to global growth in 2013. But the risk is not exclusively to the downside. As the recent months have indicated that improvements are indeed underway in the US, China and Europe, several businesses have found themselves low on inventories and are now scrambling to meet demand.


Given the shock to the global economy stemming from both the crisis and the policy responses, the medium-term risks are unusually great. The OECD area has experienced an unprecedented increase in public debt levels, and the policy response remains unclear in several large countries, including the US. The details of fiscal tightening, and hence their impact on growth, are unknown, as is the possibility of attempts to inflate. While this is predominantly a US issue, the path will have significant impact on the dollar and hence - presumably - on commodity prices (at least measured in other currencies). This leads to uncertainty with respect to the policy reaction in several large emerging markets, including the risk of further protectionist measures. And through it all, the financial sector, particularly in Europe, is likely to go through further deleveraging, which is likely to cause additional volatility in growth. Should growth disappoint in the medium term, the political risk in some of the weaker Eurozone countries would increase, potentially raising new doubts about the broader commitment to European integration.



Milan, 15 January 2013