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3 Reasons to Stay Upbeat on the Global Recovery 

Stefan Hofrichter 

Global View 


Chief Economist Stefan Hofrichter highlights the case for continued economic growth, including better-than-expected data in developed nations, an active role for central banks and a nascent rebound in emerging markets.
When investors return to their desks after the summer break, they will notice that several things have changed.

First, hard economic data in the developed world started to follow the positive trend in sentiment indicators, which we have already seen in previous months. In the US, revised GDP¹ data showed that the trough in GDP growth did not happen in the second quarter of this year, as originally expected by consensus, but instead occurred in the fourth quarter of 2012. US fiscal tightening seems to have had less of an impact on the nation’s growth than originally feared. The euro area has ultimately exited recession in the second quarter after a year and a half – one quarter earlier than we expected. The declining stress in the financial system and less fiscal austerity has supported economic activity. Consequently, euro-area equities have started to outperform global equities. The UK, too, has printed better-than-expected economic data. In Japan, economic activity is also strong, even though leading indicators have started to lose momentum. The developed world has become the major driver of global economic growth for the first time since mid-2007. Leading indicators as well as economic surprise indicators continue to rise in the developed world.

Second, the ECB² and the BOE³ have joined the Fed4 and the BOJ5 during summer months in using “forward guidance” as a non-conventional policy tool, with the aim of anchoring market expectations for short-term interest rates. Clearly, each of the four central banks is committing itself to a different degree, with the BOJ being the most explicit on its future policy stance, while the ECB is binding itself to future interest rates in a very loose manner. But despite forward guidance, bond yields have risen. Why? It seems that markets are less impressed by central banks’ guidance and more by the strength in global data.

Third, even though emerging-market growth data have been rather weak recently and markets have started to worry about the shadow-banking system in China, emerging-market equities and bonds started to outperform in August. Commodity prices, too, have risen sharply.

Clearly, one month of better performance cannot yet be called a change in trend. However, we think that the risk-reward profile of emerging-market assets and commodity prices have recently improved. Investors became excessively negative on the outlook of emerging markets in the first half of this year. Economic data, albeit not splendid, have now started to positively surprise the very downbeat expectation. In addition, the improving economic dynamics in the developed world should also have positive repercussions on the growth outlook for the emerging world going forward. With commodity demand being very much dependent on developments in emerging economies, commodity prices are likely to benefit too.

We believe all three trends outlined above have a good chance to continue in the coming weeks and months. On the back of supportive economic data, we therefore are holding on to our preference for risky assets and remain cautious on high-quality sovereign bonds. The rebound in emerging-market assets could very well continue.

1. Gross domestic product
2. European Central Bank
3. Bank of England
4. US Federal Reserve
5. Bank of Japan

The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.


Allianz Global Investors Distributors LLC, 1633 Broadway, New York NY, 10019-7585,, 1-800-926-4456.


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