Assuming that our central forecast is correct and the euro zone survives in its current form, we expect the global economy to grow by 2% at market exchange rates in 2012 (down from 2.6% this year). At purchasing power parity (PPP) exchange rates, which give more weight to emerging markets, growth will slip to 3.2% (from 3.8% this year). Paradoxically, a global recession need not result in an actual contraction in GDP; global financial organisations such as the IMF have suggested in the past that global growth of less than 3% at PPP rates would represent a sufficiently large growth gap to qualify, effectively, as a recession. Our view is that growth of around 1.5% or less at market exchange rates would constitute a recession, as would a contraction in global GDP per head. By any of those standards, the world economy is still some distance from a recession, and is not close to the cataclysm of 2009, when global GDP contracted by 0.9% at PPP rates and by an eye-watering 2.5% at market exchange rates. This is, however, little consolation. That the global economy is flirting with another recession, barely two years after the last one ended, is testament both to the severity of the shocks that have hit the economy this year—most importantly from the euro zone—and to the underlying debt loads that have left consumers, businesses and banks so vulnerable to those disruptions.
US – Economy Outlook
– The US economy grew by 2% in the third quarter, demonstrating resilience. However, fiscal tightening and weak EU demand will constrain growth in 2012. We are forecasting US GDP growth of 1.7% in 2011 and 1.3% in 2012.
– The Fed will keep interest rates very low through to the first half of 2013, but deleveraging will constrain spending. A further round of quantitative easing is possible if the economy moves towards recession and deflation is a risk.
– A large overhang of houses will prevent a recovery of the property market, with an adverse impact on households’ balance-sheets.
Western Europe – Economy Outlook
– The euro zone crisis has spread from the periphery to the core.
– The latest plan to resolve the crisis centres on a fiscal compact imposing discipline on euro member states. Some funding to stressed sovereigns is likely to be channelled through the IMF. The ECB is reluctant to buy unlimited amounts of Italian and Spanish government bonds.
– The euro zone economy has slowed sharply since mid-2011 and we now expect it to contract, by 1.2%, in 2012, before staging a modest recovery in 2013.
Japan – Economy Outlook
– The March 11th earthquake and tsunami had a severe impact on power supplies and supply chains.
– But manufacturing is already experiencing a V-shaped recovery and the economy returned to growth in the second half. After a contraction of 0.3% in 2011, we forecast GDP growth of 2.2% in 2012. From 2013 we expect the economy to grow at a rate of just above 1%.
– While the outlook for the global economy remains uncertain, the yen is set to remain strong, creating headwinds for manufacturers.
Emerging Market – Economy Outlook
– In response to fears of an economic downturn, a number of EM central banks have cut interest rates or at least postponed monetary tightening.
– EM currencies and asset markets have fallen as the euro zone crisis has caused a loss of risk appetite.
– EMs lost momentum during 2011 as developed markets hit the buffers. China is causing concern because of stresses in the housing market. For 2012 we have cut our growth forecasts to reflect sluggish demand in the West. We still expect EMs to outperform their developed peers in 2012-16.
Oil price and demand outlook
– Oil consumption growth will be constrained in 2012 by the weak OECD economic outlook. It will average nearly 2% year on year in 2013-16, led by rising demand in the developing world.
– The prospect of a resumption of Libyan output in the next 1-2 years has improved the supply outlook. Geopolitical risk remains high, however.
– Prices will weaken in 2012 in tandem with weaker demand but will pick up thereafter.
Monetary policy outlook (intrest rates)
– Faced with persistently high unemployment and the risk of a renewed downturn, the Federal Reserve will keep its policy rate at exceptionally low levels until mid-2013. Another round of quantitative easing (QE) is possible in 2012, particularly if the problems in the euro zone worsen.
– The ECB has reversed the two rate rises earlier in 2011. In 2012 we expect the ECB to cut its policy rate to 0.5%. The ECB has lengthened the term of its liquidity facilities for banks experiencing funding stresses.
Monetary policy outlook (US $ – EU € exchange rate)
– The funding stresses experienced by euro zone sovereigns and banks are being translated to the foreign-exchange market where the euro is in danger of falling out of a recent trading range of US$1.30-1.40€.
– The yen is currently fulfilling its traditional role as a safe haven but a declining domestic savings rate will make it vulnerable in the medium term.
– In the short term EM currencies are susceptible to risk aversion. But over the medium term they will be supported by growth and interest rate differentials with OECD economies.
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Ștefan A.
01/01/2012
Very interesting . 🙂
mar
01/01/2012
Seara buna 🙂
Interesant.