Markets feeling good ahead of Davos despite slowing growth

Monday 21 January 2013 18.25
Davos gathering begins on Wednesday
Davos gathering begins on Wednesday

The world's financial and political elite will head this week to the Alps for 2013's gathering of the World Economic Forum in Davos, Switzerland.

The global economy is far less plagued by fear than it was last year at the forum.

Much-feared worldwide panics from a collapse of the euro currency union have been avoided.

China appears likely to remain an engine of global growth and stocks are off to a running start in the New Year.

Davos is the venue for the World Economic Forum, an annual gathering of more than 2,000 decision-makers from nearly 100 countries and hundreds of companies that starts on Wednesday. The WEF has taken "Resilient Dynamism" as the theme for this year's event.

Yet the global economy is expected to remain sluggish in 2013, with two of the biggest economies - the euro zone and Japan - in recession. There is also a risk that the US, the world's largest economy, may slash government spending - a step that could dampen the world economy.

Few think global economic growth will even match last year's tepid 3.3%. Despite that, as fear of a catastrophe has eased, optimism appears to have taken hold among investors.

The world's financial markets have surged. Both the US Standard & Poor's 500 and Europe's STOXX 600 have risen over 13% in the past 12 months.

Fueling much of the improvement has been a flood of monetary expansion from the world's central banks. The US Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank have purchased financial assets such as bonds with newly created money.

The central banks have also slashed short-term interest rates to record lows - to near zero in the case of the Fed. The ECB has also lent over €1 trillion to banks at low rates.

The European Central Bank gave the euro zone its biggest boost when it offered last fall to buy unlimited debt of heavily indebted countries such as Spain and Italy. That action lowered their borrowing costs and eased fears that those governments would default.

Fears that the group of 17 European countries that use the euro would break up under the weight of its debt crisis faded throughout 2012. One factor bolstering the euro zone was the deal struck between Europe and the International Monetary Fund to stop Greece from being forced to default on its debts and abandon the euro.

As interest rates have dropped, investors have shifted money into stocks, property and other assets, driving up their prices. One of the biggest market jumps in 2012 came in Greece's own Athens stock exchange, where stocks catapulted 33%.

Some pillars of the US economy, like the housing, banking and car sectors, have been gradually yet steadily recovering from the American recession, which officially ended ovr three years ago. And relief was widely felt at the end of 2012, when President Barack Obama and the US Congress cut a deal on tax rates and delayed the "fiscal cliff" of automatic cuts and tax increases.

Worries that China, the world's number two economy, would suffer a sudden slowdown proved unfounded as the country's new Communist leadership appeared to signal its commitment to growth policies. Its leaders are trying to reduce China's reliance on exports by encouraging Chinese consumers to spend more at home.

Analysts caution that the still-sluggish global economy has little room for error. IHS Global Insight predicts the worldwide economy will expand just 2.5% in 2013, even less than last year's estimated 2.6%. In the US, unemployment remains elevated at 7.8% as US employers have held back on hiring and pay raises.