ECONOMIST INTELLIGENCE UNIT
(Forecast closing date: August 13th 2012)
From contraction in Europe to slowing growth in the US and China, the global economy has continued to languish in recent weeks. Policymakers are responding more forcefully—and we expect further action from them in the second half of 2012—but the headwinds they face mean that monetary stimulus can realistically do little more than prevent a deeper downturn. Our latest monthly global forecast is unchanged in most essential respects from last month’s. But the US outlook has softened a bit, and we have substantially lowered our forecast for India. As a result, our global growth forecast for 2012 and 2013 is now fractionally lower than before.
The Economist Intelligence Unit expects global GDP at purchasing power parity exchange rates to grow by 3.1% in 2012. This is slightly worse than the 3.2% we were projecting a month ago, and would mark a second successive year of slowdown for the global economy. The debt crisis in the euro zone and the slowdown in China—the world’s second-largest economy—continue to make headlines but have no impact on our forecast as we had already factored these developments into earlier calculations. Of the major economies, our forecast for Japan is also unchanged.
In contrast, we have trimmed our 2012-13 growth forecast for the US economy, which lost some steam in the second quarter and faces substantial risks from the so-called “fiscal cliff” in early 2013. We have also, notably, cut our 2012 growth forecast for India for a second month, to 6.1% from 6.5%. Poor monsoon rains are reducing output and consumption. India’s problems are compounded by high inflation and steep budget deficits, which leave little room for stimulus.
Above all, the crisis in the euro zone continues to cause global concern. Policymakers have struggled to stay ahead of skittish financial markets, and thus to alleviate fears of a euro break-up. Sovereign bond yields in countries such as Spain and Italy remain worryingly high. Signs of a more determined and coherent policy response, with the prominent involvement of the European Central Bank (ECB), have at last emerged. German opposition to rescue plans for “periphery” euro members appears to have softened, and the foundations for an eventual solution are slowly falling into place. However, the existential threat to Europe’s single currency is far from over, and a shock—such as the sudden departure of Greece—could yet send the region into a full-blown crisis.
In any event, we expect euro area demand to remain desperately weak for the time being as a number of member countries buckle under austerity. This will take a wider toll on the exports of Europe’s trading partners, both in rich countries like the US and in emerging markets. Largely for this reason we have lowered our forecast for 2012 global trade growth, from 4% to just 3.7%. To put this weak number into perspective, in 2011 global trade grew by over 6%.
Mitigating the above problems to some degree is the global response from central banks. In addition to the ECB’s pledges to do “whatever it takes” to save the euro, which could include resurrecting its government bond-buying programme, numerous other central banks are deploying new rounds of stimulus. Since the start of July, central banks in China, Brazil, South Korea, South Africa, Israel, Colombia and the Philippines have reduced borrowing costs. Most importantly, the US Federal Reserve is signalling that it may be ready to act. We think the Fed will introduce another small programme of quantitative easing at its next policy meeting in September, but more modest measures are possible if incoming data in the interim prove to be stronger than expected.
All this monetary stimulus should provide some support to the global economy in the closing months of 2012. However, it also sends a more ominous signal that the recovery from the 2008-09 recession is languishing in most places, requiring new injections of stimulus to prevent another slump. It also points to a disappointing economic outlook for 2013: with momentum slowing almost everywhere, looser monetary policy will do little more than provide a floor for growth.
Developed world
The US economy has lost momentum. GDP growth slowed to 1.5% at an annual rate in the second quarter, from 2% in the first. We now expect the weaker growth trend to continue into the third quarter and, possibly, into the fourth. As a result, we have cut our forecast for average GDP growth in 2012 to 2.1% (from 2.2%). We have also cut our 2013 forecast to just below 2%. Should a deeply divided Congress fail to extend tax cuts and take other action in late 2012 to steer the economy away from the looming fiscal cliff of massive and unintended fiscal tightening, we would need to lower our 2013 growth forecast substantially.
The euro zone, meanwhile, is preoccupied simply with survival. But achieving this is vastly more difficult in the absence of economic growth, and on this front the near-term prognosis remains bleak. We expect real GDP for the 17 euro countries as a whole to contract by 0.6% in 2012 as fiscal tightening, risk aversion and weak sentiment continue to take a toll. In so far as there is an economic recovery in 2013, we expect it to be weak, as growth-sapping austerity will still be necessary in many countries.
We forecast that Japanese real GDP will rebound and expand by 1.7% in 2012, following a contraction last year when the effects of the tsunami and earthquake depressed economic activity. Investment, which was especially weak in 2011, will drive the recovery. Exports will pick up, owing partly to a low base of comparison, but gains will be hampered by sluggish external demand and a still-strong yen. Consumer spending, which we had expected to grow at a respectable pace this year, has faded of late. As the effects of post-disaster reconstruction fade, we forecast that growth will slow to 1.2% in 2013.
Emerging markets
Two major forces—the economic slowdown in China and the escalation of the euro crisis—are helping to shape emerging-market growth prospects in 2012. Both developments threaten export demand, which remains key to economic growth in many emerging markets despite a secular shift in which domestic demand plays a bigger role. Nonetheless, economic prospects in most developing regions remain distinctly brighter than those in the rich world.
Excluding Japan, we expect Asia and Australasia to post real GDP growth of 6% in 2012 and 6.5% in 2013. China has slowed, not only because of weaker global demand but also as a result of earlier deliberate domestic policy efforts to cool overheated property markets. Real GDP growth slipped to 7.6% year on year in the second quarter. While recognising that downside risks are mounting, we maintain our view that the economy will recover in the second half and expand by 8.1% for the year as a whole. Policymakers have changed course, and are now providing stimulus that should feed into rather better growth in 2013. The picture in India is more worrying, however. Monsoon rains critical to agricultural output are nearly 20% below long-term levels, and we now forecast GDP growth of just above 6% this year and 6.5% in 2013—both well down on our recent forecasts, and far below the growth rates of 9% or so that India was expected to sustain just a few years ago.
The recession in the euro zone will act as a brake on economic activity in neighbouring eastern Europe in 2012. In the first quarter of this year, export growth and industrial output in the region weakened notably, a trend that continued in the second quarter. Domestic demand also remains generally anaemic. The Balkan economies are particularly vulnerable to a new recession in the euro zone and—in a worst-case scenario—to a euro zone collapse. Growth in the transition economies as a whole will weaken to 2.5% in 2012. In 2013 we forecast a modest pick-up, although we have cut our growth forecast from 3.3% to 3.1%.
We expect growth in Latin America to slow for a second successive year to 3.1% in 2012, reflecting the problems in the euro zone and below-par growth in the US. Weak growth in Brazil, the largest economy in Latin America, will also weigh on the region’s performance. However, we maintain the view that the region’s slowdown is cyclical rather than structural, and we expect growth to accelerate to 3.9% next year. China’s demand for soft and hard commodities continues to support Latin American economies.
Economic growth in the Middle East and North Africa will remain constrained in 2012. Contractions in Iran and Syria, and weak growth in Egypt, will offset the bounce-back in other economies that were affected by civil unrest in 2011. Nonetheless, still-high oil prices and somewhat higher output will sustain strong growth in the oil-producing countries, particularly Saudi Arabia and the Gulf states. For Sub-Saharan Africa, 2012 is likely to end up being a challenging but not disastrous year. The region’s fortunes will remain closely linked to global developments. A significantly sharper than expected slowdown in China—a crucial economic partner for Africa in terms of trade, aid and investment flows—would be of particular concern. We expect GDP growth of 4.3% this year in Sub-Saharan Africa as a whole, accelerating to 4.7% in 2013.
Exchange rates
In August the US dollar gave back some of the gains it had recorded since April but, measured against most developed- and emerging-market currencies, it remains much stronger than it was several months ago. The dollar has appreciated as the euro zone crisis has deepened, the global economy has slowed and investors have become more risk-averse. With the euro zone likely to be in a recession for much of 2012 and China’s economy slowing, investor interest in the dollar should be sustained. We forecast an average annual exchange rate of US$1.27:€1 in 2012. However, we do not rule out periodic bouts of euro strength: if the euro zone crisis eases at some point in the second half of the year, global risk tolerance is likely to rise, which is usually negative for the dollar.
Commodities
In recent weeks there have been diverging trends in commodity prices. Prices of industrial raw materials, particularly base metals, have remained weak, reflecting persistent concerns about global growth prospects. However, oil prices have picked up owing to a combination of weak supply growth and renewed geopolitical concerns. Meanwhile, the prices of some agricultural commodities—especially maize and soybeans—have soared as weather-related damage to crops has led to much tighter market balances.
Our forecast for international oil prices is unchanged this month. Prices for Brent crude have rebounded strongly from a low of US$88/barrel in mid-June, and stood at US$113/b in mid-August. We still expect oil to cost US$109.5/b on average this year, falling to US$103.4/b in 2013. Based on our estimates of market fundamentals and our subdued outlook for global growth, the oil market will be in comfortable surplus in 2012-13, contributing to the easing of prices moving into 2013.
World economy: Forecast summary
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Real GDP growth (%)
World (PPP exchange rates) a 5.2 2.4 -0.9 5.1 3.7 3.1 3.6 4.0 4.1 4.2
World (market exchange rates) 4.0 1.2 -2.4 4.1 2.6 2.1 2.5 2.9 2.9 3.0
US 1.9 -0.3 -3.5 3.0 1.7 2.1 1.9 2.2 2.3 2.3
Japan 2.2 -1.1 -5.5 4.5 -0.7 1.7 1.2 1.6 1.2 0.9
Euro area 2.9 0.2 -4.4 1.9 1.5 -0.6 0.4 1.2 1.4 1.5
China 14.2 9.6 9.2 10.4 9.2 8.1 8.5 8.1 8.0 8.0
Eastern Europe 7.5 4.6 -5.6 3.4 3.8 2.5 3.1 3.8 3.8 3.9
Asia & Australasia (excl Japan) 9.3 5.5 5.0 8.4 6.5 6.0 6.5 6.5 6.5 6.5
Latin America 5.7 3.9 -1.9 6.0 4.3 3.1 3.9 4.1 4.0 4.1
Middle East & North Africa 4.9 4.4 1.7 5.2 3.4 3.3 3.9 4.6 4.9 4.9
Sub-Saharan Africa 7.0 4.8 1.2 4.4 4.4 4.3 4.7 5.0 5.0 5.0
World inflation (%; av) 3.4 4.9 1.5 3.0 4.1 3.4 3.4 3.3 3.3 3.3
World trade growth (%) 7.2 2.4 -11.7 14.3 6.3 3.7 5.1 5.5 5.8 5.9
Commodity prices
Oil (US$/barrel; Brent) 72.7 97.7 61.9 79.6 110.9 109.5 103.4 104.5 107.3 110.0
Industrial raw materials (US$; % change) 11.3 -5.3 -25.7 45.4 18.2 -16.8 7.7 4.1 1.2 1.6
Food, feedstuffs & beverages (US$; % change) 30.9 28.1 -20.3 10.7 29.4 -2.4 -0.8 -5.3 -4.0 1.2
Exchange rates (annual av)
¥:US$ 117.8 103.4 93.6 87.8 79.8 79.4 82.6 86.8 89.0 92.2
US$:€ 1.37 1.47 1.39 1.33 1.39 1.27 1.26 1.25 1.24 1.26
a PPP = purchasing power parity
Source: Economist Intelligence Unit.
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