EIU forecast—Central banks
step in, but weaknesses remain
The outlook for the global economy
is mixed: growth is slowing, but the announcement of significant new measures by
the world's two largest central banks has encouraged investors. Financial
pressures in the euro zone, in particular, have receded. However, trading
conditions remain difficult, and our latest monthly forecast downgrades 2012
growth prospects for a number of countries—most notably China. In addition, we
have lowered fractionally our global growth forecast for
2013.
We still expect global GDP at purchasing
power parity (PPP) to grow by 3.1% this year, but we now believe that the
recovery in 2013 will be slightly weaker than previously forecast. Global growth
next year will be 3.5% at PPP exchange rates. This marks a downgrade from 3.6%
last month and reflects the continuing slowdown in major economies. US growth
decelerated for a second straight quarter in April-June and is now growing at
less than half the pace it was at the end of last year. The euro zone remains
mired in recession, and would be doing even worse were it not for mild German
growth. China, increasingly an engine of global as well as Asian growth, is
taking longer than expected to feel the benefits of policy stimulus. We now
expect Chinese GDP growth in 2012 to fall below 8% for the first time since
1999.
That said, the last month has been
notable for a series of positive developments for the global economy, which have
been welcomed by investors. In Europe, the European Central Bank (ECB) has
announced a programme to buy government bonds from countries such as Spain and
Italy in potentially unlimited quantities. By far the ECB's boldest move to
date, the programme reduces the likelihood of market panic and limits the risk
of contagion. The German constitutional court's recent favourable ruling on the
euro zone's permanent bail-out fund has also been crucial in calming nerves.
Spanish and Italian government bond yields have fallen sharply, indicating
improved investor confidence.
The other key development has come in
America, where the US Federal Reserve has announced a third programme of
quantitative easing (QE). Like the ECB's move, QE3 is significant in providing
open-ended support for the US economy: the Fed says it will buy some US$40bn of
mortgage-backed securities every month until the jobs outlook recovers, and has
also indicated that it will not immediately turn off the monetary taps when
conditions improve. Whether or not QE3 will invigorate the US economy is hotly
debated, however. It should boost asset prices and could thus trigger a wealth
effect that raises consumer spending. But its side-effects could include higher
oil and commodity prices.
The risks to the global economy remain
on the downside. A solution to the euro zone's debt crisis, even if achievable,
will at best take shape slowly. In the meantime, any number of triggers—from
anti-austerity politics in various countries to renewed disagreements between
Greece and its creditors—could cause markets to take fright. In the US, the
electoral cycle means that Congress has only a narrow window in which to steer
the economy away from the "fiscal cliff" at end-2012. China is entering a tricky
political transition that, if mishandled, could have implications for the
economy.
Developed world
US economic growth was a subdued 1.7%
(at an annualised rate) in the second quarter, and soft jobs data in July and
August suggest that prospects for the second half of the year are not
particularly bright. QE3 is unlikely to have a visible impact until almost the
end of the year. We forecast average GDP growth of 2.1% in 2012 and 1.9% in
2013. We have not yet raised next year's forecast because of the new QE
programme, but will soon be doing so. Nonetheless, any boost to GDP will be
modest.
The euro zone's debt crisis is
unresolved, but we believe that the framework for an eventual solution is
falling into place. The ECB's new bond-buying programme and its pledge to do
"whatever it takes" to save the euro have bought policymakers time, and progress
is being made on fiscal and regulatory integration. This is not to downplay the
severe economic difficulties still facing most countries in the currency zone,
especially those in the so-called "periphery". Greece's long-term future as a
euro member looks difficult. We expect the economic downturn in the euro zone to
continue into the second half of the year, driven by fiscal austerity. In so far
as there is a recovery in 2013, we expect it to be weak, with growth of 0.4%, as
fiscal cuts will still be necessary in most countries.
The outlook is rather brighter in Japan.
We have raised our 2012 forecast for economic growth to 2%, from 1.7%.
Reconstruction spending after last year's tsunami and earthquake is having a
more pronounced effect than we expected. However, growth will slow to 1.2% next
year as the post-disaster boost comes to an end. Longer-term growth prospects
remain weak.
Emerging
markets
A combination of recession in Europe,
sluggish demand in the US and general risk aversion has hit the developing
world. In Asia, there are signs that the Chinese economic juggernaut is losing
momentum, and we have cut our 2012 growth forecast from 8.1% to 7.8%. Although
the delay in the effects of stimulus means lower growth this year, it should
result in stronger data in 2013. We have, accordingly, slightly raised our China
growth forecast for next year to 8.6%. Elsewhere in emerging Asia, India has
slowed sharply and will grow by barely 6% in the current fiscal year. South-east
Asia's trade-oriented economies are exposed to weak demand in the West and in
China, but their fundamentals are generally positive.
Notwithstanding recent upbeat
developments, the euro crisis has dented immediate growth prospects for the
transition economies of eastern Europe. Many of these countries rely heavily on
the euro zone for trade, investment and financing—although oil-rich countries
such as Russia have been more insulated from the crisis. Eastern Europe remains
vulnerable to further problems in the euro zone, but the ECB's latest actions
have made the risks to our forecast—which previously were skewed to the
downside—more balanced. Regional growth will slow to 2.5% this year but should
pick up to about 3% in 2013.
Growth in Latin America is set to slow
for a second consecutive year in 2012, reflecting a range of factors from
outright contraction in the euro zone to below-par growth in the US. It also
reflects a further downward revision to our forecast for Brazil, Latin America's
largest economy. Brazilian GDP will grow by just 1.5% this year. However, the
economy may have turned the corner, and we expect stimulus to carry over into
2013, when growth will pick up to over 4%. Latin America as a whole will also
see stronger growth in 2013, thanks to resilient domestic demand and a recovery
in the OECD.
Economic contractions in Iran and Syria,
as well as weak growth in Egypt, will affect prospects for the Middle East and
North Africa this year. Sanctions and lower oil output will hit Iran, although
other oil-producing countries in the region will generally perform very well.
Regional growth will pick up slightly in 2013, thanks to massive infrastructure
programmes in Saudi Arabia and other Gulf states. In Sub-Saharan Africa, the
outlook has weakened noticeably since our last forecast. We now expect growth of
4.1% this year and 4.4% in 2013. Any significant slowdown beyond what we already
predict for China—a crucial economic partner for Sub-Saharan Africa—would be of
particular concern.
Exchange
rates
The US dollar has given back most of the
gains it had recorded since April, with much of the decline coming in the past
six weeks. Deciphering movements in currency markets has been particularly
challenging in recent years, but this latest shift is easier to explain. The
dollar has declined as sentiment in the euro zone has improved, and as investors
have priced in a third round of QE in the US (duly announced by the Fed in
mid-September).
Looking ahead, we see two possible paths
for the euro:dollar exchange rate. If conditions in the euro zone continue to
improve, the dollar could weaken further and breach US$1.40:€1. Alternatively,
renewed market concern over the euro zone could again erode confidence in the
euro, boosting the dollar. Given the propensity of market fears to overwhelm all
else, and with euro sentiment certain to face more setbacks, we see a limited
upside to the euro's recent rise. We therefore retain our 2012 forecast for an
average exchange rate of around US$1.28:€1, with the dollar strengthening
slightly to US$1.26:€1 in 2013.
Commodities
The Fed's announcement of QE3 is
undeniably positive for commodity prices, especially when combined with further
Chinese stimulus and the ECB's latest moves to stabilise the crisis in the euro
zone. However, investors may already have priced in much of the good news.
Markets might pause now before potentially strengthening again if and when the
physical impact of QE—in terms of stronger commodity demand—materialises. Of all
the commodities, gold is perhaps the most obvious beneficiary of the Fed's move.
Gold's properties as a store of value and as a hedge against inflation will be
attractive to investors given expectations of a long period of low interest
rates and unorthodox monetary relaxation.
Oil prices have rebounded strongly from
a low of US$88/barrel (dated Brent Blend) in mid-June to US$117/b in
mid-September. We forecast an average oil price of US$109.5/b this year. Based
on our estimates of market fundamentals and our subdued outlook for global
growth, we expect prices to fall back again moving into 2013.
| World economy: Forecast summary | ||||||||||
| 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | |
| Real GDP growth (%) | ||||||||||
| World (PPP exchange rates) a | 2.4 | -0.8 | 5.0 | 3.7 | 3.1 | 3.5 | 4.0 | 4.1 | 4.2 | 4.1 |
| World (market exchange rates) | 1.3 | -2.3 | 3.9 | 2.6 | 2.2 | 2.4 | 2.9 | 2.9 | 3.0 | 2.9 |
| US | -0.3 | -3.1 | 2.4 | 1.8 | 2.1 | 1.9 | 2.1 | 2.2 | 2.3 | 2.3 |
| Japan | -1.1 | -5.5 | 4.6 | -0.7 | 2.0 | 1.2 | 1.6 | 1.2 | 0.9 | 0.8 |
| Euro area | 0.2 | -4.3 | 2.0 | 1.5 | -0.4 | 0.4 | 1.2 | 1.4 | 1.4 | 1.2 |
| China | 9.6 | 9.2 | 10.4 | 9.2 | 7.8 | 8.6 | 8.0 | 8.0 | 7.8 | 7.8 |
| Eastern Europe | 4.6 | -5.6 | 3.4 | 3.8 | 2.5 | 3.0 | 3.7 | 3.7 | 3.9 | 4.0 |
| Asia & Australasia (excl Japan) | 5.5 | 5.0 | 8.4 | 6.5 | 5.7 | 6.4 | 6.5 | 6.5 | 6.5 | 6.4 |
| Latin America | 3.9 | -1.9 | 6.0 | 4.3 | 3.1 | 3.9 | 4.2 | 4.0 | 4.1 | 4.1 |
| Middle East & North Africa | 4.4 | 1.7 | 5.2 | 3.4 | 3.4 | 3.9 | 4.7 | 4.9 | 5.3 | 5.0 |
| Sub-Saharan Africa | 4.8 | 1.2 | 4.4 | 4.4 | 4.1 | 4.4 | 5.0 | 5.0 | 5.2 | 5.0 |
| World inflation (%; av) | 4.9 | 1.5 | 3.0 | 4.1 | 3.4 | 3.3 | 3.4 | 3.4 | 3.3 | 3.2 |
| World trade growth (%) | 2.4 | -11.7 | 14.3 | 6.3 | 3.5 | 4.6 | 5.3 | 5.7 | 5.7 | 5.4 |
| Commodity prices | ||||||||||
| Oil (US$/barrel; Brent) | 97.7 | 61.9 | 79.6 | 110.9 | 109.5 | 103.4 | 104.5 | 107.3 | 110.0 | 115.0 |
| Industrial raw materials (US$; % change) | -5.3 | -25.7 | 45.4 | 21.1 | -18.6 | 7.4 | 4.2 | 2.7 | 1.1 | 1.3 |
| Food, feedstuffs & beverages (US$; % change) | 28.1 | -20.3 | 10.7 | 30.1 | -2.8 | -0.9 | -5.6 | -2.8 | 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 | ||||||||||
| Source:
Economist Intelligence Unit. - Umesh Shanmugam | ||||||||||
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