Falling commodity prices and resilience in risky assets signal that the current economic consolidation phase will give way to a renewed global acceleration in the second half of 2013, according to ING Investment Management (ING IM).
Valentijn van Nieuwenhuijzen, Head of Strategy at ING Investment Management said: "The combination of falling commodity prices and risky asset resilience is exactly the opposite of what we have been seeing at the start of downturns in global growth over the past three years. This, in a nutshell, is why we remain positive on the global cycle.
“Our view remains that the current constellation of the global economy can best be thought of as resulting from a set of persistent tailwinds and temporary headwinds. The latter comprises US fiscal tightening, distortions introduced by the unusually cold weather in March, waxing and waning political uncertainty in various regions and some renewed question marks about cyclical momentum in China and Emerging Market space in general.”
ING IM highlights that the tailwinds include the structural shift in central bank reaction functions towards a bigger relative emphasis on growth and/or financial stability. The investment manager believes that this has been a powerful driver behind the resilience in risk appetite in financial markets. Furthermore, the combination of a more growth-friendly central bank and easier financial conditions has also positively affected corporate willingness to spend.
Looking at commodities, the decline in prices amounts to a transfer of real income from commodity producers to commodity consumers. ING IM states that, since consumers have a higher marginal propensity to spend, this is undoubtedly a positive for global growth.
Valentijn continues: “The decline in commodity prices amounts to a transfer of real income from commodity producers to commodity consumers. Since the latter have a higher marginal propensity to spend, this is undoubtedly a positive for global growth. These days one frequently hears that markets are ‘running ahead’ of the fundamentals as rising risk appetite goes hand in hand with a soft patch in global momentum. In a way, this is simply how the monetary transmission mechanism works.”
ING IM explains that easier monetary policy - which is a response to softer growth - induces more accommodative financial conditions leading to an acceleration in growth momentum via positive wealth, cost of capital and confidence effects, albeit with long and variable lags.
Valentijn concludes: “Over the past five years, a multitude of large, and often political, shocks vastly overwhelmed the positive effects exerted by monetary policy.
“The initial increase in private sector confidence that sparked a rally in risky assets was often not validated and, as a result, the markets and the economy were thrown right back to where they started. Presently, there is still no evidence of the kind of disruptive shock. Hence, we believe that the improvement in private sector and market expectations seen since the summer of last year will be validated this time around.”
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