Guest Blog: No Need to Whisper It: We’ve Turned the Corner

We've turned the corner. When I say “we,” I of course mean the world. And once again the economy that will have the greatest influence on world recovery is that of the United States. The unsubtle sign of US recovery is jobs growth, which we referred to last week and which has exceeded expectations.


In the last six months the private sector has added more 700,000 jobs, pushing the unemployment rate nearly 0.5 lower. The market expectation for the next two quarters is bullish, with an average expected non-farm payrolls positive number of over 200,000 each month, and with the rate itself expected to be below 8.00 percent in the first quarter of next year.

The subtle signs are evident from a reducing level of job layoffs in the public sector, as well as decreasing pressure on state budgets, which The Economist noted this week as signifying that the worst is over. The 3-month T-bill rate is still in single figures, suggesting that risk aversion remains strong, but one shouldn’t expect to see that yield rise materially until the Federal Reserve has given a sign that base rates are rising. The forward OIS (overnight indexed swap) curve shows this isn’t expected until after 2014, but if jobs performance continues at the present rate, I suspect the Fed will announce a change of plan next year. We certainly won’t get any more QE.

As Ian Dury might have asked, are there any other reasons to be cheerful? The Greek bailout for one…it hasn’t solved the structural problems of the euro of course, and Greece will need fiscal transfers from the European Union for some years yet, but at least the crisis feeling has gone, the bondholders have taken their hit and the credit default swap has been triggered. The EU will be in recession this quarter, but next quarter we should see a rebound.

Second, the oil price: What looked like an inexorable rise upward has been checked, for now, after it appeared that any madness in the straights of Hormuz arising from an attack on Iran is off the immediate cards. So a slight decline in the oil price is something to expect and will benefit demand levels.

All this should give businesses some positives to work on and allow them to start investing some of their excessive cash pile (it is interesting to note that on both sides of the Atlantic companies are hoarding a large amount of cash, awaiting events before committing to capital projects). If sentiment continues to pick up from the level where it was in the dark days of last Autumn, we’ll see those funds being put to work, which is all the extra ingredient the economy needs to return to sustained growth.

US GDP growth is expected to be at least 2.0 percent, even on pessimistic forecasts. That’s impressive given the lingering effects of the 2008-2009 recession. The UK will struggle to hit over 1.0 percent GDP growth this year, but at least the number will have a “+” in front of it, which was not the case as recently as the last quarter.

What does all this suggest for investors? Market levels will be rising from here. Reducing risk aversion now seems like the sensible thing to do. Forecasting is a problematic exercise at the best of times, but on the basis of current macroeconomic evidence, the least we can conclude is that US and EU equity indices will be higher at year-end than where they are now. While I’m at it, I’m also bullish on the British pound, which will be at 1.65 against the dollar and 1.36 (in old money) against the euro.

As long as there isn’t another war in the Middle East, 2012 is shaping up to be the year we turned the corner from the bad old days of 2008.

The author is Professor Moorad Choudhry, Treasurer, Corporate Banking Division, Royal Bank of Scotland.

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