october 2011 eiu global economic forecast
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Global forecasting serviceEconomic forecast summary - November 2011
www.gfs.eiu.com
TM
The economy grew more slowly than thought in the first half of 2011, in part owing to high gasoline prices. We are forecasting US GDP growth of 1.6% this year and 2% in 2012. Fiscal tightening will subtract from growth in 2012-13 but Mr Obama’s stimulus and jobs package will soften the blow, provided it is passed by Congress. The Fed will keep interest rates very low through the first half of 2013. But deleveraging will constrain spending. A large overhang of houses will prevent a recovery of the property market, with an adverse impact on households’balance-sheets.
Policymakers are struggling to contain the eurozone crisis which has spread to the large economies of Italy and Spain.The latest plan to resolve the crisis is expected to comprise coordinated bank recapitalisation, an expansion of the lending capacity of the EFSF through guarantees, and an increased write-down of Greek debt. None of these steps is without problems. The eurozone economy has slowed sharply since mid-2011 and we now expect it to contract, by 0.3%, in 2012, before staging a modest recovery in 2013.
The March 11th earthquake and tsunami have 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 0.5% in 2011, we forecast GDP growth of 2.3% 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.
The Brazilian and Israeli central banks have responded to the worsening global outlook by cutting policy rates. With inflationary pressures now abating, other EM central banks may cut rates or at least postpone monetary tightening. EMs have lost momentum in the second quarter as developed markets have hit the buffers. China is causing concern because of stresses in the housing market. For 2012 we have trimmed our growth forecasts to reflect sluggish demand in the West. We still expect EMs to outperform their developed peers in 2012-16.
Oil consumption growth will dip slightly in 2012 in tandem with weaker global growth. 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.
Demand is expected to weaken in 2012 owing to a slowdown in the developed world and somewhat slower growth in the developing world
However, rising emerging market incomes and urbanisation will underpin medium-term demand growth
Years of underinvestment, particularly in agriculture, will support prices
Nominal prices will remain historically high in 2012-16, albeit slipping from the recent peaks seen in mid-2008 and early in 2011. Prices will also ease back in real terms.
Faced with persistently high unemployment and the risk of a double-dip recession, the Federal Reserve will keep its policy rate at exceptionally low levels until mid-2013. The Fed is extending the maturity of bonds it holds through its quantitative easing (QE) programme. In light of the escalation of the eurozone debt crisis, we now expect the ECB to reverse the rate rises of April and July by the end of the year. The ECB has reactivated its term liquidity facilities for banks experiencing funding stresses.
The support the euro has been receiving from a positive interest differential in relation to the dollar is fading as debt stresses in the eurozoneperiphery escalate.
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 vulnerable to risk aversion. But over the medium term they will be supported by growth and interest rate differentials with OECD economies.
- The Chinese economy crashes
- New asset bubbles burst, creating renewed financial turbulence
- Disorderly defaults by developed world-sovereigns rock markets
- The euro zone breaks up
- The global economy falls into recession
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25
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+ Oil prices slump
- Economic upheaval leads to widespread social and political unrest
- The US dollar crashes
- Oil prices remain at extremely high levels
- Tensions over currency manipulation lead to protectionism
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