July 9, 2012
We have marked down our forecast for global GDP growth by three to four-tenths of a percent for 2012 and 2013 compared to three months ago.
This reflects three developments that have stiffened the headwinds facing global activity: (1) the intensification of risk surrounding the future of the euro, which has depressed sentiment, markets, credit growth prospects, and private sector spending plans, (2) growing uncertainty about how the impending fiscal cliff and longer-term fiscal challenges in the US will be dealt with, and (3) the slowness or reluctance of policymakers in key emerging markets to react to a greater-than-expected slowing of growth.
The downward revision would have been greater were it not for the recent substantial decline in oil prices, some of which we expect to stick in the quarters ahead. We still see a moderate pickup in growth to 3.5% in the year ahead (2012: 3.2%) and a slight increase in inflation following a sizeable decline this year. With the US economy seen as a relative engine of growth, albeit only a modest one, our strategists remain relatively bullish on US equities and, at least for the near term, the dollar. At the same time, we expect bond yields to remain very low and to rise moderately next year as the US fiscal cliff is delayed and credible progress is made towards fiscal unification in Europe. Overall, we see risks to the global outlook still weighted to the downside.
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