July 16, 2012
We have marked down our global forecast by three-tenths of a percentage point for 2012 and four-tenths for 2013. The forecasts for both the euro area and the US have been reduced a bit more than the global average, emerging Asia significantly more, and Japan a good deal less. The downward revisions largely reflect the effects of intensified euro-related uncertainty. These effects can be felt worldwide as evidenced by the global increase in risk aversion and in particular by the decrease in imports to the eurozone, the volume of which is roughly equal to those to the US.
Downward corrections due mainly, but not exclusively to the euro crisis
In Europe, the EU summit and prospects for Spanish bank recapitalisation in particular turned out moderately positive relative to our cautious expectations. Nonetheless, the recession in the eurozone is likely to persist until year-end and lead to negative GDP growth of roughly 0.5% for the year on average. Events in Europe have not been the only growth depressants. The downgrading of growth prospects also reflects a number of factors in other regions. In the US, domestic factors were probably at least as important as the depressing effect of the latest euro shock on the stock market and household and business sentiment. Most notably, US fiscal contraction has proceeded somewhat faster than expected already this year and contributed to a surprisingly sluggish performance of the labour market. Moreover, uncertainties surrounding the looming US fiscal cliff and how both taxes and spending will be reformed to address the longer-term US fiscal challenge have caused businesses and even some households to cut back their spending plans. The most notable outlier in this picture is Japan, which continues to surprise to the upside in 2012 as rebuilding activity following the earthquake and tsunami continues to boom. However, the growth forecast for 2013 has been revised down.
Emerging markets also encountering headwinds
The growth forecasts for China, India and Brazil have been marked down substantially for this year and in some cases for next year as well. In China and India, the slowdowns in response to past policy tightening have been greater than we had expected and the ensuing policy stimulus more timid than expected. In India’s case this is due in particular to persistently elevated inflation pressures.
Growth still projected to pick up in 2013
Overall, we see a global economy that is set to decelerate to 3.2% growth in 2012, yet likely to edge back up to 3 1/2% in 2013. However, this means the growth rate will probably fall far short of its pre-crisis trend of about 4%. Within the advanced economies, we still have US growth picking up to moderately above trend in 2013. The euro area is the only region projected to be in recession this year and near recession in 2013; even so, we think the worst should be over by later this year, with growth picking up modestly in 2013. Nonetheless, the downside risks will probably still outweigh the upside in this forecast.
Lower commodity prices holding back inflation for now
Global inflation is projected to slow significantly this year from last year’s elevated pace, thanks in large part to a sharp easing of commodity price pressures. We have global inflation edging higher next year as commodity prices recover to some extent.
Central bank policy extremely loose in advanced economies
Major central banks are at or near the zero bound, and have expanded their balance sheets dramatically. While the ECB rate cut in early July severely dashed hopes of further unconventional easing, a further vLTRO is still very probable since the political measures proposed to address the economic imbalances will require a long time to be implemented and there may be a considerable number of obstacles along the way. By contrast, we do not expect the Fed to engage in further slackening of the monetary reins.
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