FROM THE ECONOMIST INTELLIGENCE UNIT
(Forecast closing date: October 14th 2011)
Global economic conditions have deteriorated. The debt crisis in the euro zone has badly hit European growth prospects, and concerns are mounting about the potential knock-on effect on the US economy. This month the Economist Intelligence Unit has accordingly lowered its forecasts for both the euro zone and the US. We now think that the euro zone will suffer an outright contraction in GDP in 2012, and that US growth will fall below 1.5%.
World GDP will grow by 3.3% in purchasing-power-parity (PPP) terms in 2012. This would mark a slowdown from expected growth of 3.7% in 2011 and almost 5% the year before that. (In 2010, global growth was boosted by massive policy stimulus, the effects of which have sadly now faded.) We forecast that global growth will pick up to 4% in PPP terms in 2013.
The existential crisis affecting the European single currency remains at the epicentre of global economic risk. We still think that, on balance, policymakers will do just enough to ensure the euro’s survival, but the crisis is taking an increasingly heavy toll on both the financial sector and the real economy. European banks remain under severe pressure because of fears over their exposure to potentially non-performing sovereign debt. Global financial markets are transmitting this uncertainty—along with broader doubts over the viability of the single currency—to the rest of the world.
All this is eroding consumer and business confidence. It is compounding the effects of other recent shocks to the global economy, which have included the Arab uprisings and the March 2011 tsunami in Japan. The threat of recession in Europe and the US is also being felt in emerging markets, many of which are big exporters to the West. Some emerging markets are concerned enough to be re-evaluating or reversing course on monetary policy, having previously focused on the risks of rising inflation. Because of the deteriorating growth outlook for the euro zone and the US, we have lowered our 2012 GDP forecasts for most emerging markets—including for China, India, Russia and Brazil.
Is there any good news? Many economic indicators in the US are still positive. US companies still have lots of cash to expand if—and this remains a big “if”—they feel confident enough to do so. The big rise in US productivity in the past two years also suggests that businesses have squeezed all they can out of efficiency gains and will now have to hire and invest in order to grow. The easing of oil prices from their mid-2011 highs should give some support to economic activity, particularly in the US. Interest rates remain at or near record lows in many countries. Nonetheless, the overriding picture is one of economic gloom.
Developed world
We have cut our forecast for US GDP growth in 2012 to 1.3%. This is down from our previous forecast of 2%, and mainly reflects uncertainty over the euro zone. The US economy has slowed dramatically over the past 12 months. While it is still resisting recession—purchasing managers’ surveys, capital spending, job creation and retail sales, for example, have showed varying degrees of strength—consumer and business confidence has weakened. Stockmarkets have sold off. The downgrade in our US forecast also reflects a change in our assessment of the extent to which President Barack Obama will succeed in implementing stimulus measures announced in September, given Republican opposition to them.
Japan, meanwhile, is still trying to recover from the earthquake and tsunami that hit its north-east coast in March. Power outages and supply-chain disruptions have been major problems. Now economic prospects are complicated by the fact that external markets have faltered. Japanese exporters are also having to contend with a strong yen, which is hurting their competitiveness. Despite this, we expect a reconstruction-based recovery to kick in in the second of half of this year and to continue in 2012, when real GDP will grow by 2.3%.
For Europe, the sovereign debt crisis in the euro area overshadows all issues. Contagion threatens the very survival of the single currency, and disagreement among the euro zone’s 17 members about the best course of action is eroding confidence further. Market pressures have compelled countries to implement painful austerity measures, hurting growth prospects and in turn making the fiscal adjustment that much more difficult. For 2012, we have slashed our real GDP forecast for the euro zone as a whole. We now expect a contraction of 0.3%, compared with a forecast of positive growth of 0.8% previously. Assuming the crisis is contained, growth should resume in 2013, but the recovery will be anaemic.
Emerging markets
Economic growth is losing momentum in most emerging markets, and few countries will be able to grow at anything approaching trend rates if economic activity slows precipitously in the West. By region, Asia remains in the best shape overall. Recent data point to a broad slowdown brought on in part by anti-inflationary policy, but Japan’s post-tsunami rebound is helping to cushion the impact of global weakness. Although there is now a real danger that Asian economies will experience more than a benign slowdown, a return to recession remains unlikely. Unlike in the West, most countries could respond to such a scenario by introducing further fiscal and monetary stimulus. Chinese GDP growth will slow to a still-impressive 8.2% in 2012, assuming that the authorities stave off inflationary spirals or a property crash.
Latin America enjoyed a strong rebound in 2010, but growth will slow to 3.7% in 2011 owing in part to efforts to ward off high inflation. Growth will moderate further next year, to 3.5%, although some countries may be able to cushion the impact of weak external demand by a degree of policy loosening. Economic expansion should pick up in 2013-16, thanks to rising domestic consumption, sound macroeconomic policies and Asian demand for commodities. However, high commodity prices will continue to reinforce the region’s traditional two-speed growth pattern, with South American economies performing better than elsewhere.
The recovery in eastern Europe is slackening. Although exports and industrial output are still growing, regional currencies and stockmarkets have suffered sharp falls. The spectre of contagion from the sovereign debt crisis in the euro zone, which is also eastern Europe’s key export market, continues to loom large. Regional growth will slip to 3.3% in 2012. Russian growth prospects will continue to depend on world commodity prices.
Political upheaval and civil unrest have undermined economic growth across broad swathes of the Middle East and North Africa. However, the region is set to stage a recovery next year. Despite the worrying outlook for the developed world and somewhat weaker global oil prices, faster regional growth will be driven by massive public investment in Saudi Arabia, robust growth in Iraq and—assuming that major political turmoil subsides—a rebound in countries affected by the Arab Spring. Elsewhere, economic growth in Sub-Saharan Africa will accelerate to 5% in 2012. Structural constraints remain serious, but regional economies will draw strength from high commodity prices, rising external inflows, fiscal spending and sporadic economic reforms.
Exchange rates
The downturn in the global economy has had a noticeable effect on key global exchange rates. Risk tolerance is taking the shape of weekly, and in some cases daily, shifts in the “risk-on, risk-off” trade. Movements in the US dollar/euro currency pair are a case in point. In September the dollar climbed rapidly, to a high of US$1.32:€1, as the euro zone crisis deepened. It then fell back to US$1.38:€1 in mid-October as officials offered stronger pledges to recapitalise European banks. The European Central Bank now looks likely to reverse its recent interest-rate hikes; this more dovish position implies further euro weakness. We expect the dollar to strengthen to an average of US$1.33:€1 versus the euro in 2012. But it will weaken further, on average, against the yen, to ¥77:US$1.
Commodities
The prices of most commodities, especially industrial raw materials, went into freefall in the past month amid global financial market turmoil. Prices had stabilised by mid-October, but they remain hostage to investors’ concerns about global growth and the debt crisis in the euro zone. On average, commodity prices will weaken in 2012 as consumption growth slows and supplies increase. However, low global interest rates and a loss of confidence in sovereign creditworthiness will provide some support to commodities as an asset class, propping up prices.
Oil prices will remain volatile in coming quarters, reflecting uncertainties surrounding both demand and supply. We now expect that a return to market surplus, stockbuilding and a somewhat stronger US dollar will exert downwards pressure on the oil price next year, resulting in an annual average of US$90/barrel for Brent crude (dated Brent). Thereafter, improved economic prospects will produce a muted recovery in prices in 2013, with further gradual gains in the next few years as consumption growth accelerates. It will take until 2016, however, for the price of Brent crude to return to this year’s average of around US$110/b.
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The Economist Intelligence Unit
