ECONOMIST INTELLIGENCE UNIT
The global economy has essentially stalled since the second quarter of 2012. Conditions in most countries remain weak, and in some have deteriorated as consumers, businesses and investors await clearer signals on a range of risks—from the US “fiscal cliff” to the crisis in the euro zone. Some of this uncertainty should fade in the coming months, and we expect a modest pick-up in growth in 2013 as stimulus in China and the US kicks in. We have slightly raised our US forecast this month to reflect more aggressive monetary easing by the US Federal Reserve. Our global forecast is largely unchanged.
World GDP will increase by 3.1% in purchasing-power-parity (PPP) terms in 2012. This will be substantially slower than in 2011 and 2010, underlining the headwinds that markets have faced in the past two years—particularly as a result of the euro crisis. The uncertainties holding back growth can be condensed to three questions: whether the euro zone’s new policies will stabilise financial markets and prevent a break-up of the single currency; whether US lawmakers will rise above political partisanship to prevent a sharp fiscal contraction in 2013; and whether, and when, China’s efforts to boost its economic growth will succeed.
On all three fronts, we think moderately favourable outcomes are likely. We remain most concerned about the euro zone. But the framework for an eventual solution to the crisis is slowly taking shape, and a new bond-buying programme announced by the European Central Bank (ECB) promises to ease financial strains. The potentially unlimited nature of ECB intervention is significant. Meanwhile, we continue to believe that a deeply divided US Congress will ultimately compromise on tax-cut extensions and other measures to prevent the economy from falling over the so-called “fiscal cliff” in early 2013. The Chinese economy, recently sluggish by its elevated standards, may be close to turning a corner. Infrastructure spending is accelerating, and manufacturing has improved slightly.
The upshot is that global growth should pick up to about 3.5% next year. The euro zone will just about stagger out of recession, albeit to grow only fractionally. In China, stimulus in the second half of 2012 will flow through into its economy next year, pushing growth back to well above 8%. The US should also benefit from the third round of quantitative easing unveiled in September. While “QE3” will be no panacea in a still-weak economy, the Fed’s open-ended support marks a significant step-up in policy. It means that GDP should grow slightly more quickly next year than we previously expected.
None of this, however, amounts to a strong expansion. There has been no real momentum in the world economy for some time. The Great Recession of 2008-09 and the subsequent debt crisis in Europe have saddled many countries with weak economic foundations and little or no resilience to stress of any kind. The world economy’s structural problems will not be resolved quickly. Central bank injections are welcome but will do little more than provide a foundation for slightly better growth in the short term. At no point in the next five years do we expect global growth to reach 5% at PPP rates, the sort of pace needed to reduce unemployment substantially.
Developed world
The US economy grew by 1.3% (annualised) in the second quarter, down from 2% in the first. Labour market data suggest that the third quarter will have been slightly firmer, although fiscal uncertainty will weigh on business and household spending in the fourth quarter. GDP growth will average 2.1% in 2012. We have revised 2013 growth up, also to 2.1%, to account for a modest improvement resulting from QE3. Although we had factored QE3 into our previous forecast, the Fed’s bond-buying programme goes further than we had anticipated. Our 2013 forecast remains contingent on Congress steering the economy back from the fiscal cliff after the November 6th elections; if it fails to do so, we would need to lower our forecast drastically.
In Europe, the ECB’s new sovereign bond-buying programme has yet to be activated, but its very existence has had a calming effect on markets. However, the debt crisis continues to weigh heavily. The euro zone’s recession continued in the second quarter of 2012, despite mild German growth. Countries in the “periphery”, including Spain and Italy, remain especially weak. We expect the downturn to continue in the second half of 2012, and forecast a contraction of 0.4% in the year as a whole. The recession in the euro zone periphery will continue in 2013, but core economies should show some resilience. As a result, we expect overall growth of 0.4% in 2013, helped by better external conditions.
Japan’s economy has slowed as the effects of post-tsunami reconstruction have faded. Weak external demand and a strong yen are also squeezing the economy. Nonetheless, growth in 2012 will average a relatively robust 2% thanks to the statistical boost from the strong start to the year. In 2013 Japan should benefit from rising global industrial production, provided that the recovery in China gains momentum. Even so, GDP growth will to slow to 1.2% as the one-off lift from reconstruction falls out of the national accounts. High energy imports will also hold back growth, as almost all of Japan’s nuclear reactors remain offline.
Emerging markets
The weak global environment is having an impact on emerging markets, many of which are having to adjust to reduced export demand and scarcer investment funding. In emerging Asia, the region’s two largest economies, China and India, have both decelerated. For India we have cut our growth forecast in the 2012/13 fiscal year for a third month, to 5.8%. The economy was weaker than expected in April-June, and power shortages and inadequate monsoon rains will have hurt growth in subsequent months. In China, we expect growth to pick up as stimulus takes effect and as demand in the West recovers modestly. However, there is a chance that the upturn will not materialise until the first quarter of 2013.
The troubles in the euro zone have dimmed economic prospects in eastern Europe. Growth has weakened as the region’s most important market and source of investment has entered recession. Domestic demand in eastern Europe also remains generally anaemic, partly owing to budgetary constraints. We expect regional GDP growth to average 2.5% this year, down from almost 4% in 2011. However, growth will pick up somewhat in 2013.
Latin American growth will slow for a second successive year in 2012, to 3.1%. Recession in the euro zone and below-par growth in the US will take a toll on the region, as will anaemic growth of only 1.5% in Brazil—by some margin Latin America’s largest economy. However, we maintain the view that the slowdown in the region is cyclical rather than structural. Brazilian growth will pick up to 4.2% next year. Regional growth will also accelerate in 2013. It will average about 4% over the next five years, thanks to sound macroeconomic policies in most countries (Argentina and Venezuela being notable exceptions), resilient domestic demand, and recovery in OECD economies.
Civil war in Syria, sanctions against Iran and weak growth in Egypt are hampering economic prospects in the Middle East and North Africa. However, still-high oil prices and somewhat higher output will sustain strong growth in the oil-producing countries. Regional growth will pick up slightly in 2013, boosted by massive infrastructure spending in Saudi Arabia and other Gulf states. Growth will strengthen markedly from 2014 as hydrocarbons output continues to rise, oil prices stabilise at a high nominal level and infrastructure projects come on stream.
In Sub-Saharan Africa, the weak global economic outlook represents the main threat to growth in the short to medium term. We recently lowered our 2012 and 2013 forecasts for GDP growth in South Africa, the engine of economic activity in Sub-Saharan Africa. Regional growth will pick up to 4.4% next year. The medium-term outlook remains positive, with growth likely to average around 5% in 2013-17. This would make Sub-Saharan Africa one of the best-performing regions in the world, although the general operating environment will remain difficult.
Exchange rates
In recent weeks the US dollar has given back almost all of the gains it had recorded since April. Key factors have been improved sentiment towards the euro and investor anticipation of the latest round of QE in the US (which will tend to depress the dollar as investors look for higher returns elsewhere). We see two possible paths for the euro:dollar exchange rate in the coming months. If conditions in the euro zone continue to improve, and in the light of the Fed’s new, open-ended bond-buying programme, it is possible that the dollar will continue to weaken. In an extreme case, it could breach US$1.40:€1. Alternatively, a renewed bout of market concern could again erode confidence in the euro, boosting the dollar. Given the propensity of market fears to overwhelm all else, and with the euro debt crisis certain to deliver more setbacks, we see a limited upside to the euro’s recent rise. We therefore retain our forecast for an average exchange rate of around US$1.28:€1 in 2012 and US$1.26:€1 in 2013.
Commodities
After big rises in July and August, commodity prices have drifted—and in some cases fallen—in recent weeks. Commodity markets had initially responded bullishly to the prospect of additional QE in the US, signs of a more concerted effort by the ECB to help to resolve the euro crisis and announcements that China would try to kickstart growth. But prices now appear to be in holding mode, waiting for signs that the good news will have a positive impact on physical demand for commodities. Stronger growth in China and other developing countries will support consumption of raw materials in 2013. Loose global monetary conditions will also be generally positive for commodity prices.
The oil market is being pulled in different directions, reflecting a combination of heightened political risk and weak economic data. Based on market fundamentals and the subdued outlook for global growth, we expect the oil market to be in comfortable surplus in 2012-13. Although we have raised our 2012 forecast slightly, to US$111/barrel for dated Brent blend, we expect the price to ease to around US$103/b on average next year.
World economy: Forecast summary
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Real GDP growth (%)
World (PPP exchange rates)a 2.4 -0.8 5.0 3.8 3.1 3.5 4.0 4.1 4.1 4.1
World (market exchange rates) 1.3 -2.3 3.9 2.6 2.2 2.5 2.9 2.9 3.0 2.9
US -0.3 -3.1 2.4 1.8 2.1 2.1 2.3 2.3 2.4 2.4
Japan -1.1 -5.5 4.6 -0.7 2.0 1.2 1.6 1.2 0.9 0.8
Euro area 0.2 -4.3 2.0 1.5 -0.4 0.4 1.2 1.4 1.4 1.2
China 9.6 9.2 10.4 9.3 7.8 8.6 8.1 8.1 7.8 7.8
Eastern Europe 4.6 -5.6 3.4 3.8 2.5 2.9 3.7 3.7 3.9 4.1
Asia & Australasia (excl Japan) 5.5 5.0 8.4 6.5 5.7 6.3 6.5 6.6 6.5 6.4
Latin America 3.9 -1.9 6.0 4.3 3.1 3.8 4.0 3.9 4.0 4.1
Middle East & North Africa 4.4 1.3 5.2 3.4 3.4 3.8 4.7 4.9 5.3 5.0
Sub-Saharan Africab 4.8 1.2 4.4 4.4 4.1 4.4 5.0 5.0 5.3 5.0
World inflation (%; av) 4.9 1.5 3.0 4.1 3.4 3.4 3.4 3.3 3.3 3.2
World trade growth (%) 2.4 -11.7 14.3 6.3 3.3 4.5 5.3 5.6 5.7 5.7
Commodity prices
Oil (US$/barrel; Brent) 97.7 61.9 79.6 110.9 111.0 103.4 104.5 107.3 110.0 115.0
Industrial raw materials (US$; % change) -5.3 -25.7 45.4 21.1 -19.3 7.1 4.0 4.1 1.1 1.3
Food, feedstuffs & beverages (US$; % change) 28.1 -20.3 10.7 30.1 -2.8 -1.8 -6.2 -1.3 1.1 1.9
Exchange rates (annual av)
¥:US$ 103.4 93.6 87.8 79.8 79.4 82.6 86.7 89.0 92.2 91.4
US$:€ 1.47 1.39 1.33 1.39 1.28 1.26 1.25 1.24 1.26 1.26
a PPP = purchasing power parity b Refers to Angola, Kenya, Nigeria and South Africa only.
Source: Economist Intelligence Unit.
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