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Broadgate: Weekly Briefing

20 January 2012

Global – The World Bank has warned developing countries they need to be prepared for shocks as global economic growth slows. The organisation has slashed its growth forecasts, and is now predicting a 0.3percent contraction for the eurozone in 2012.

“Developing countries need to evaluate their vulnerabilities and prepare for further shocks, while there is still time,” said World Bank chief economist Justin Yifu Lin. “Escalation of the crisis would spare no-one,” the report’s author warned.

The World Bank is predicting growth of 5.4percent for developing countries in 2012 and 1.4percent for high income countries, down from its forecasts of 6.2percent and 2.7percent respectively in June.

Europe – The International Monetary Fund (IMF) is proposing to raise its lending capacity by as much as USD500bn to insulate the global economy against any worsening of Europe’s debt crisis.

The Washington-based lender is aiming to increase its resources after identifying a potential need for USD1tn in financing in coming years, an IMF spokesman said in a statement. The IMF is studying options and will not comment further until it has consulted its members, the fund said. To incorporate a cash buffer, the lender is seeking a total USD600bn.

Germany – German investor sentiment improved markedly in January, reaching its highest level since last July, a closely-watched survey has suggested.

The ZEW economic sentiment index rose to minus 21.6 points, up from minus 53.8 in December. However, this is well below its historical average of 24.5.

The think tank cited policies to tackle the eurozone debt crisis as reasons for the improvement, it also highlighted the fresh supply of money from the European Central Bank.

ZEW said the survey suggested that, within six months, German economic activity was likely to “stabilise further instead of deteriorating further”.

Greece – Key talks between Greece and its private creditors that could affect the country’s future in the eurozone resumed on Wednesday.

The two parties are trying to agree loan write-offs of about 50percent to help Greece slash its high debt levels. The talks stalled last Friday as the two failed to reach agreement.

A deal is necessary if Greece is to receive the next tranche of the bailout cash it needs to pay its debts.

Reports have suggested that a small number of hedge funds are blocking the deal, either to try to force a reduced write-off or to trigger a default, against which they are insured.

Without the bailout money, the Greek government could run out of cash and be forced to default on its debts.

China – A European trade envoy visited Beijing on Wednesday to make a more ambitious offer to open its market for government purchases of technology and other goods to foreign suppliers.

China pledged to join a global treaty that extends free trade rules to government purchases when it joined the World Trade Organization a decade ago. But U.S. and European officials and businesses say it is offering too little market access.

Europe and the U.S. are pressing for changes because in China the government is often the biggest customer for software, medical equipment, personal computers and other goods with high profit margins.

Foreign companies can bid for government contracts, but business groups complain they often have trouble getting information on bid requirements. They say Chinese rules often are imposed unevenly, often to the favour of local firms.

Commodities – Commodities rose the most in two weeks on Wednesday, amid speculation that China may ease monetary policy, boosting prospects for raw-material demand, after its economy expanded at the slowest pace in more than two years.

A Standard & Poor’s Index of 24 raw materials climbed 1.2percent, the biggest gain since 3 January. A gauge of industrial metals rose to an 11-week high, leading the rally.

Commodities have advanced 15percent from a 10-month low on 4 October. Copper, crude oil and gold may rally this year as economic growth in China and the U.S. counter the impact of a European recession, Goldman Sachs Group said last week.

Spotlight on: why China isn’t due for a ‘hard landing’

Widely regarded as one of the most pre-eminent figures in global asset management, when Jim O’Neil shares his thoughts on one of the most topical subjects in investment news, the rest of the world tends to take notice.

Previously head of global economic research and commodities and strategy research at Goldman Sachs, O’Neil is best known for his prominent economic thesis regarding the economic nations referred to as BRICs (Brazil, Russia, India and China). He coined the phrase in a 2001 paper entitled “The World Needs Better Economic BRICs.”

One of the current issues gripping investors and advisors alike is that of the longevity of the Chinese economy, in-particular whether it is due a ‘hard landing’ (a burst of the speculative bubble created by massive foreign investment, particularly into its property market).

Its official fourth-quarter growth rate may have been its slowest in more than two years, but according to O’Neil, China’s economy remains the one to beat. Official figures from China’s statistics bureau confirmed that the economy rose by 8.9per cent in 2011.

O’Neill, the Goldman Sachs analyst who foresaw China’s potential rise more than a decade ago, said the markets (along with analysts and experts) have been too focused on anticipating China’s hard landing, and that the more it is predicted, the more it does not actually happen.

“It’s a bit stronger than I thought as well, actually. It is a bit of a blow for the ‘hard landing’ guys, given inflation has come down so much as well,” O’Neill said.

China’s domestic economic growth, and its resulting parallel contribution to the global economy, will potentially continue as the “most important thing in the world.” suggests O’Neil.

“Let me put it in the context of a bigger picture. I am assuming this decade that China will grow by 7.5percent per annum, if this happens, China will contribute more to global growth than the U.S. and Europe put together by the end of the decade,” Mr O’Neill said.

Amid global concerns on where China is heading in the next decade and if it could still suffer a slow down, O’Neill said that the Chinese government remains very much concentrated to fine-tuning their very own policies, an attitude which he seems to find commendable.

“All of the concerns that many people have expressed are pretty important issues to consider. There are lots of challenges, as there frequently are with China, but the thing that generally impresses me is that Chinese policymakers themselves do not shy away from acknowledging that many of these things are issues, and they try to deal with them,” the Goldman Sachs analyst said.

“The big one is the property issue… Chinese property prices have turned because the Chinese authorities have deliberately stopped them from going up. That should have been what the Federal Reserve should have done in 2005 and 2006 and maybe before that, but it is tough in a democracy. That is why you get the wild housing bubbles in many Western economies…In China’s case, they are doing it deliberately to stop a bubble.”

“From everything I have understood from going there for 20 years, the Chinese do not crave the exact form of democracy that we have and think they should have. They want more freedom and really want more wealth. If the Chinese authorities continue to provide that and it spreads, then I think generally speaking, the Chinese people will be happy,” Mr O’Neill said.

Regarding concerns that Greece may default, O’Neill said China’s economy generates the equivalent of Greek gross domestic product every four months. “Greece itself is not that important,” he said. “What is important is how Greece deals with the restructuring or a default, which seems quite possible, and the contagion of that through the rest of Europe is extremely important.”

O’Neill said European markets had “sort of” shrugged off last week’s Standard & Poor’s downgrade of France and eight other European countries. He said it wasn’t clear whether that was because people perceived the European Central Bank is “going to be doing more and more” or there are “some signs of some stabilising in the economy.”

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