Global Economy Reviews

02.11.2012 13:45 World Economy Review - October 2012

Plagued by uncertainty and fresh setbacks, the world economy has weakened further and will grow more slowly over the next year, the International Monetary Fund says in its latest forecast. Advanced economies are risking recession, the international lending organization said in a quarterly update of its World Economic Outlook, and the malaise is spreading to more dynamic emerging economies such as China.
The IMF forecasts that the world economy will expand 3.3 percent this year, down from the estimate of 3.5 percent growth it issued in July. Its forecast for growth in 2013 is 3.6 percent, down from 3.9 percent three months ago and 4.1 percent in April.
Underpinning that bleaker scenario are the assumptions that Europe will continue to ease monetary policy and that the U.S. will avert a crushing blow to growth by fending off a so-called "fiscal cliff" that could result from a failure to reach a compromise on its budget law and tax cuts.
Conditions could worsen if the United States doesn`t deal with its budget crisis soon, the IMF said. "Downside risks have increased and are considerable," the fund said. It said its forecasts are based "on critical policy action in the euro area and the United States, and it is very difficult to estimate the probability that this action will materialize."
The IMF has urged the U.S. to raise the ceiling on the level of debt the government can issue, which is capped by law. In August 2011, a battle between the Obama administration and Congress over raising the limit wasn`t resolved until the U.S. almost defaulted on its debt.
Global efforts to ease credit and increase the amount of money available for lending are helping, but appear to be yielding diminishing returns, as are fiscal stimulus policies, the IMF warned. "Because uncertainty is high, confidence is low, and financial sectors are weak, the significant fiscal achievements have been accompanied by disappointing growth or recessions," it said. Among other things, it says governments need to do more to relieve the burden of household debt that is constraining spending power and thus crippling demand.
While large corporations pay record low rates for credit, households and small companies struggle to obtain bank loans, it said. Fortifying domestic demand is all the more crucial given weakening trade trends. The IMF forecasts that growth in world trade volume will slump to 3.2 percent this year from 5.8 percent last year and 12.6 percent in 2010.
"Low growth and uncertainty in advanced economies are affecting emerging market and developing economies through both trade and financial channels, adding to homegrown weaknesses," the IMF`s chief economist, Olivier Blanchard, said in a statement.
But he said a more optimistic scenario was possible if the right measures are taken, such as fixing banks in European countries and reducing the uncertainty about U.S. policies. "The case for an upside scenario is stronger than it has been," he said at the opening of the IMF meeting in Tokyo.
He noted some positive signs in the U.S. economy such as a turnaround in the housing market. The IMF also sees the slowdown in China as part of a shift from the past double-digit growth to a rate that is "sustainable," a process he described as "a soft landing." And the slowdown in developed nations had pushed down exports, the key factor behind the slowdown in China, Blanchard and other IMF officials said.
The IMF raised the U.S. growth forecast slightly, to 2.2 percent this year from 2 percent in July. For 2013, though, it expects U.S. growth of 2.1 percent, down from 2.3 percent. Among the 17 nations that use the euro, low growth in the major "core economies," such as Germany and France, will be offset by outright contractions in the smaller economies, leading real gross domestic product to fall by about 0.4 percent in 2012, the IMF said. It forecasts growth in the euro area will stay flat in the first half of 2013 and tick up to about 1 percent in the second half of the year, the IMF said.
The IMF said it expects growth in Japan to hit 2.2 percent this year but to slacken further as reconstruction from the March 2011 disasters winds down, falling to 1.2 percent in 2013. Japan, whose population is both shrinking and aging faster than elsewhere, is confronting problems of high debt and stagnation, it said.
As usual, the bright spots are developing economies that were less affected by the global financial crisis, where rising employment and strong demand will help support growth, the IMF said. China`s economy will likely expand 7.8 percent this year, down from July`s 8 percent forecast, though a pickup in construction projects is expected to spur growth late in the year. India`s economy will grow 4.9 percent, down from 6.1 percent. And Brazil`s growth will be only 1.5 percent, compared to 2.5 percent.
The IMF advised policymakers to devise stronger medium-term fiscal and structural reforms to shore up confidence in the growth potential of the advanced economies. Only then, will investor confidence in markets and public debt be restored. "Unless governments spell out how they intend to effect the necessary adjustment over the medium term, a cloud of uncertainty will continue to hang over the international economy, with downside risks for output and employment in the short term," it said.

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02.10.2012 14:27 World Economy Review - September 2012

Fitch Ratings has reduced its global economy growth outlook for 2012, 2013 and 2014, noting there are risks to the economic recovery, despite the multiple monetary recovery plans proposed. The economic statistics and the recent indexes shed light on the lasting weakness of the growth and risks to the global economic recovery, the agency says.
In its three-month report the agency announced its new economic forecasts for the current and next two years. According to the agency the global economy will grow 2.1%, 2.6% and 3% in 2012, 2013 and 2014. Earlier Fitch predicted growth of 2.2%, 2.8% and 3.1%.
Fitch Ratings has cut its 2012 growth forecasts for China to 7.8% from 8% and India to 6% from 6.5%. Both regional giants face a deteriorating global growth outlook with diminished willingness or capacity to respond with domestic policy loosening, compared with 2009.
Slower exports are weighing on China`s growth, but Fitch views the slowdown as also reflecting the authorities` efforts to squeeze consumer and house-price inflation out of the system after the strong credit-led stimulus of 2009-2010. Fitch expects slowing construction activity to knock about 0.8 percentage points (pp) off China`s growth in 2012.
The agency expects only marginal policy loosening unless the labour market deteriorates sharply. Fitch does not expect a "hard landing" in China given the authorities` scope for fiscal and monetary policy flexibility if they choose to use it. The resilience of the labour market seen in current data suggests growth of 7.5%-8% may be in line with the economy`s potential rate.
Weak corporate profitability poses downside risk for China`s economy. This could eventually incline firms to shed labour which would in turn affect consumption, currently a resilient part of the outlook. Real estate and construction have been a source of downside risk given the authorities` restrictive policies in the sector following its rapid growth in 2009-2011.
However, the residential real estate market has shown some signs of turning the corner in summer 2012, which leans against a negative outcome. A significant deterioration in financial stability and in the ability of the banks to transmit monetary loosening is another but more remote risk to the outlook. India`s economic outlook remains challenging. Investment rose just 0.7% yoy in Q212, with higher-frequency indicators pointing to another weak outturn in Q3.
Ongoing concerns over government economic and investment policy may be weighing on business confidence. The authorities` ability to respond with looser policy is constrained by India`s high inflation, fiscal deficit and public debt. Fitch projects India`s general government deficit at 8.5% of GDP in fiscal 2012, leaving little room for fiscal easing.
A number of quarters of weak investment, in turn, may be starting to affect the economy`s supply capacity, pointing to a weaker growth outlook. The authorities have announced a range of reforms in September 2012 including liberalization of FDI in multi-brand retail which may help to restore confidence and lift investment, although the volatile political environment points to implementation risk.
The growth outlook is holding up better elsewhere in emerging Asia in part because of the growing importance of domestic demand in many regional economies. The 0.3pp reduction in Korea`s forecast for 2012 to 2.5% is modest and underpins the open, trade-driven economy`s resilience, a key factor behind Fitch`s upgrade of the Korean sovereign to `AA-` in September. Growth in Malaysia and Thailand will benefit in the short run from public-sector-led investment.
Indonesia`s growth forecast is unchanged at 6%, reflecting the increasing importance of domestic demand as a driver of that country`s growth, notwithstanding the importance of commodity exports. Fitch has cut its forecast for growth in the major advanced economies by 0.2pp in 2012 (to 1%) and 0.3pp in 2013 (to 1.4%).
The agency has revised down its expectations in the euro area to a 0.5% contraction in 2012 and just 0.3% growth in 2013, while the US forecast remains unchanged at +2.2%/+2.3%. Russia, however, is set to outperform, with its GDP adding 3.5% in 2013 and 2014.

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31.08.2012 18:07 World Economy Review - August 2012

Moody`s Investors Service has slashed its growth forecasts for the advanced and emerging nations in the G-20, citing an increase in the downside risks to global recovery.
In its latest Global Macro-Risk Outlook 2012-2013 update, the ratings agency says real growth in the G-20 economies will be about 2.8 per cent in the 2012 and 3.4 per cent in the following year. This is a respective 20 basis points and 10 basis points lower than Moody`s predicted in April.
According to the agency, the main risks to global growth are the deeper than expected recession in the eurozone, the danger of a hard landing in major emerging markets such as China, India and Brazil, an oil-price supply-side shock caused by resurfacing geopolitical risks and the potential for sudden and sharp fiscal tightening in the US next year.
G-20 advanced economies, which include the eurozone, the UK and the US, are expected to grow by about 1.4 per cent in 2012 and 2.0 per cent in 2013. This compares with 1.4 per cent last year and 3 per cent in 2010.
Moody`s group credit officer for sovereign risk Elena Duggar says: In our view, fiscal consolidation efforts, weak consumer and business confidence, banking and household sector deleveraging, persistently high unemployment levels and real-estate market weakness will continue to constrain growth in advanced economies.
The ratings agency also predicts G-20 emerging economies will grow by about 5.2 per cent in 2012 and 5.7 per cent next year. This is materially lower than the 6.6 per cent seen in 2011 and the 8 per cent achieved in 2010.
Duggar says: We are revising downwards our forecast for these large emerging market economies, where the weaker external environment and decelerating domestic demand are causing a slowdown in growth momentum.
We continue to expect that the slowdown in advanced economies and volatile capital flows will suppress growth in emerging markets.

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02.08.2012 16:01 World Economy Review - July 2012

The International Monetary Fund cut its forecast for global economic growth and warned that the outlook could dim further if policymakers in the euro zone do not act with enough force and speed to quell their region`s debt crisis. In a mid-year health check of the world economy, the IMF said emerging market nations, long a global bright spot, were being dragged down by the economic turmoil in Europe. It said a drop in exports in these countries would combine with earlier policies meant to prevent overheating and slow growth more sharply than hoped. The IMF shaved its 2013 forecast for global growth to 3.9 percent from the 4.1 percent it projected in April, trimming projections for most advanced and emerging economies. It left its 2012 forecast unchanged at 3.5 percent. "Downside risks to this weaker global outlook continue to loom large," the IMF said. "The most immediate risk is still that delayed or insufficient policy action will further escalate the euro area crisis."
The global lender said advanced economies would grow only 1.4 percent this year and 1.9 percent in 2013. It also trimmed its forecast for emerging economies, projecting they will expand 5.9 percent in 2013 and 5.6 percent in 2012. Both figures are 0.1 of a percentage point lower than in April. The IMF cut its 2013 growth forecast for the crisis-hit euro zone to 0.7 percent, while maintaining its projection of a 0.3 percent contraction this year. It said it now believes Spain`s economy will shrink both this year and next. The IMF sharply revised down its growth projections for the United Kingdom to 0.2 percent this year and to 1.4 percent in 2013. In April, the fund said the UK economy would expand 0.8 percent in 2012 and 2.0 percent next year.
The IMF said the European Central Bank had room to ease policy further and said officials in emerging economies should stand ready to cope with a drop in trade and increased volatility in capital flows. The IMF cut its 2012 growth forecast for China to 8.0 percent from 8.2 percent, and said it now expects growth of 8.5 percent next year, down from 8.8 percent.
It revised its growth projections for India to 6.1 percent this year from 6.9 percent, and chopped its 2013 forecast to 6.5 percent from 7.3 percent. Meanwhile, Africa`s growth is still seen at a robust 5.4 percent this year and 5.3 percent in 2013, as the region remains relatively insulated from external financial shocks. The IMF said growth in the Middle East will be stronger this year as key oil-producing countries boost production and Libya`s economy rebounds from conflict in 2011, but it held its forecast for next year at 3.7 percent.

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02.07.2012 16:29 World Economy Review - June 2012

The latest economic forecasts from rating agencies Standard & Poor`s and Fitch show the latter remains more optimistic about U.S. economic growth than its larger rival, especially for next year. Fitch released for the first time its GDP projection for 2014, expecting the U.S. economy to grow at a pace of 3.0%, slightly more than the 2.9% expected by Standard & Poor`s. The gap between the two agencies` GDP projections is slightly wider for this year: 2.2% for Fitch and 2.0% for S&P. But the largest divergence is for 2013, when the U.S. GDP growth rate is expected to reach 2.1% by S&P and 2.6% by Fitch`s estimate.
In its Global Economic Outlook, Fitch revised down it world GDP forecast by 0.1 point for both 2012 and 2013, led by downward revisions in the euro zone but even more so -- for 2012 -- by emerging markets.
The latter are losing steam, the rating agency said, expecting BRICs -- Brazil, Russia, India and China -- to grow at a pace of 6.0% this year and 6.6%, revised down by 0.3 point, and 6.6% in 2013, which was unrevised.
Even as emerging markets growth is still expected to outpace that of major advanced economies by a significant margin over the next two years, "The vulnerabilities of future BRICs growth to domestic and global shocks have increased," Fitch said.
In the eurozone, GDP is expected to decline this year by 0.4% before recovering 0.9% in 2013, both revised down 0.2 point. "Financial tension has resurfaced in the eurozone and the negative impact on GDP growth will be significant," Fitch said. Fitch`s global growth forecast is 2.2% for 2012 and 2.8% in 2013, compared with 2.3% and 2.9% in the previous Global Economic Outlook. In the U.S., noting the recent slowdown in the job market signaling weaker business sentiment, Fitch expects it "to be offset by continued resilience in consumer spending." For 2012 and 2013, Fitch has kept its U.S. growth forecast unchanged at 2.2% and 2.6% respectively, and projects and average growth of 3.0% in 2014.
Turning to monetary policy in major advanced economies, Fitch said record low interest rates are likely to stay in place through mid-2013, warning that "The impact of further monetary stimulus would be doubtful given the already minimal yields of safe haven assets at longer maturity."
Still, "A dovish statement and a downward spin on Fed forecasts are very likely, which takes it one step closer towards another unconventional policy move," the report continued. It added that "with the momentum in the U.S. economy cooling and if market financing dries up after the Greek vote, the Fed may be forced to open its toolbox sooner than it thought."
Standard & Poor`s expects the U.S. GDP to grow at a pace of 2.0% this year, 2.1% in 2013, 2.9% in 2014 and 3.4% in 2015. It does not expect the unemployment rate to fall below 8% before 2014, with the improvement accelerating the following year to 7.1%.
Standard & Poor`s remains the most pessimistic of the Big Three, as Moody`s sees U.S. real GDP rate rising to 2.6% next year from 2.3% this year, slightly more than Fitch`s 2.2% forecast. However, Moody`s forecasts included in its May 15 Credit Opinion refer to fiscal years.

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