Summary of their opinions on the US, Middle East, Europe, Canada, India China and more below:
- We expect world GDP to grow by around 3% both this year and next. The US economy is set to recover steadily but the euro-zone recession will deepen, causing the sovereign debt crisis to flare up again and the euro-zone itself to begin breaking apart. Growth in the major emerging economies is likely to slow more gradually, except in emerging Europe, parts of which face recession. Against this backdrop, industrial commodity prices will fall a lot further. Headline inflation will also come down, though less steeply than seemed likely a few months ago. This will reduce the scope for further unconventional monetary policy this year although monetary policy will remain very loose in all the major economies.
- The outlook for the United States continues to improve and we now expect growth of 2.0% this year and 2.5% in 2013. In contrast to last year, when growth slowed after a strong start to the year, the US recovery looks on firmer ground. The housing and auto sectors seem to have turned the corner and credit is rising steadily. But GDP growth will not accelerate to the rates which have been typical during previous recoveries because of continued deleveraging by households and businesses and on-going fiscal consolidation. Inflation is set to drop to around 2% by year-end, but is unlikely to fall much further: energy prices remain relatively high and unit labour costs have rebounded. The combination of steady growth and stable inflation suggests the Fed will refrain from a third round of quantitative easing.
- Meanwhile, hopes that the ECB’s liquidity support and the recent Greek debt restructuring have solved the euro-zone crisis are likely to be dashed. Large parts of the euro-zone are fundamentally uncompetitive and have unsustainable debt burdens. These problems cannot be resolved by ECB liquidity measures. Moreover, we expect GDP to contract in the euro-zone as a whole this year and in the majority of its seventeen members. Italy and Spain will miss their fiscal targets for 2012 and be forced into further austerity. But this will not restore growth or confidence. Core economies will therefore need to provide further support for the periphery. With Greece facing yet another year of deep recession, we still expect some form of euro-zone break-up to begin in the coming year or so.
- Following its earthquake-induced recession in 2011, Japan is on course to register low but positive growth this year. But this is largely due to reconstruction spending and subsidies for fuel-efficient cars, two supports which will fade after this year. Indeed, the government will eventually be forced to tighten fiscal policy to address the dire state of its public finances. And although we expect the central bank to extend its asset purchase scheme again, this will not be enough to kick-start credit growth or banish the spectre of deflation.
- The UK may avoid following the euro-zone into recession in the first quarter of this year because falling inflation has alleviated the squeeze on real incomes and fiscal cuts are less deep this year than last. However, any pick-up in activity is likely to fizzle out in the coming quarters. Rising unit labour costs will force firms to shed workers in greater numbers and exports will be hit by the gathering euro-zone recession. What’s more, households may simply use any
increase in real incomes to reduce their still high levels of debt.
- Canada’s economy should continue to grow this year as it will benefit from rising exports to the US and booming investment in energy and mining. However, there is a growing risk that a slump in the housing market will trigger a slump in household consumption and construction spending.
- Growth in China has probably bottomed out for now and GDP is set to rise by around 8.5% this year, which is only a little slower than last year. The authorities have made concerted efforts to loosen monetary policy over the past few months as inflation has slowed and property prices have fallen. This has fed through to lower market interest rates and faster credit growth. What’s more, we expect a further 200bp of cuts to required reserves this year. That said, China has become even more reliant on fixed investment in recent years. We think this will fade in 2013, resulting in slower GDP growth.
- India’s economy slowed more sharply than China’s last year as investment there has fallen outright. Business surveys suggest there was a rebound in the first quarter but we expect growth of only around 7% in 2012. Having fallen steeply in the past few months, inflation is unlikely to drop much further over the course of 2012. Nonetheless, the Reserve Bank of India will probably find room to cut its repo rate by a further 50bp from its current level of 8%.
- Prospects are brighter in most other countries in emerging Asia. In south-east Asia, strong fundamentals and rising regional trade will support growth. The more open economies such as Hong Kong and Singapore will be affected by a fall in external demand but the larger economies are more reliant on domestic demand. Inflation is set to decline in most countries (though not all), leaving room for modest rate cuts over the course of the year.
- We expect growth to slow abruptly in those parts of Emerging Europe which are most heavily exposed to the euro-zone. Activity in Russia is also likely to slow after rapid growth in the first quarter, particularly if we are right in forecasting the oil price to drop steeply. This will also put a strain on the public finances and
the current account balance. One bit of good news is that the risk of a disorderly balance of payments crisis in Turkey has eased since the
winter. But Turkey’s economy has all but come to a halt and its external deficit is still high.
- The latest business surveys suggest the outlook in Latin America has brightened a little since the New Year. That said, we expect activity to slow again in the coming quarters, particularly if capital inflows weaken once more and commodity prices fall. Inflation is coming down in all the major Latin American economies and this will allow central banks to cut interest rates further. Brazil, which is coming to the end of its rate-cutting cycle, is likely to leave rates on
hold until well into next year.
- Prospects are bright for the oil exporters in the Middle East and North Africa, but they are grim for the resource-poor economies, several of which are in political turmoil. There is a growing risk that political wrangling in Egypt and inability to reach an agreement with the IMF will result in an uncontrolled currency devaluation in that country.
- Finally, the outlook remains broadly positive for sub-Saharan Africa. Growth picked up in SouthAfrica in the first quarter of this year, but as in Latin America it will slow if global commodity prices and capital inflows fall. Elsewhere, the commodity exporters such as Nigeria continue to post strong growth, notwithstanding the continued high political risks in many countries.