Global Economy Reviews

04.06.2012 10:52 World Economy Review - May 2012

The World Bank cut its GDP growth forecast for the country in 2012 to 8.2 percent, and urged the government to adjust monetary policies, including easing liquidity, to propel growth. Analysts who made similar predictions said a soft landing of the country`s economy could be achieved, but suggested divergent measures to sustain stable growth.
Slow growth in the eurozone and a sluggish US recovery limited the country`s net exports, and tighter monetary policies aimed at containing inflation also dampened growth in its investment, the World Bank said in a report, cutting down its growth forecast from its previous prediction of 8.4 percent made in January.
"China`s near-term policy challenge is to sustain growth through a soft landing. Reserve requirements could be tweaked further to ease the availability of credit, and ongoing administrative efforts, which had been helpful in cooling the property market, would preferably be phased out," the report said.
Wang Jun, a deputy director of the Consulting Research Department at the China Center for International Economic Exchanges, a government think tank, told the Global Times that in the near term, domestic liquidity is sufficient following the recent reserve requirement ratio cut by the central bank. "Domestic credit demand is relatively weak so far, but releasing more liquidity in the future is necessary," Wang said.
The People`s Bank of China lowered the reserve requirement ratio by 50 basis points on May 18, the third cut since November 2011. After the cut, it was estimated that 500 billion yuan ($79 billion) would be released to pump up bank lending, which would be an important step to stimulate the economy.
Regarding the World Bank`s suggestion of easing restrictions on the property market, Wang cautioned that the cancellation of current administrative efforts could lead to a dramatic rebound in home prices.
There are few signs to show that home prices have seen an obvious decline. In April, 43 out of the 70 major cities tracked by the National Bureau of Statistics witnessed slight property-price drops, but 24 cities still remained unchanged.
Lu Zhengwei, chief economist with the Shanghai-based Industrial Bank, told the Global Times that a slight adjustment to property macro-controls is acceptable, but "a sudden brake may cause serious problems." "In the next 10 years, most East Asian countries, including China, need to prevent a rapid climb in property prices to avoid a bubble," Lu said.
Both analysts predicted China`s economic growth rate would be similar to the World Bank`s figure, mainly attributing it to sluggish exports. Lu said a further depreciation of the yuan would be a possible way to stimulate China`s exports. "The yuan is over-valued currently, which directly leads to a decline in exports," Lu said, citing proof that the imports to the US and Japan from other countries increased recently, but that imports from China had dropped.
Both the experts and the World Bank considered fiscal measures, including targeted tax cuts, social welfare spending and other social expenditures, are necessary to let the country`s economy enter a soft landing. China set its GDP growth target at 7.5 percent this year, down from the 8 percent goal in 2011. "The government lowering its growth target showed its resolution in shifting the focus from economic growth rate to development quality," Wang said. Meanwhile, Indian GDP growth slides to 5.3 per cent a clear sign that the country`s slowdown is deepening and affecting all sectors of the economy. Sharp falls in the manufacturing and agriculture sectors have led Asia`s third-largest economy to grow only 5.3 per cent year on year in the first three months of 2012, compared to 9.2 per cent growth a year earlier.
This is the worst performance of India`s economy in nine years and far worse than the situation in the wake of the global financial crisis and the collapse of Lehman Brothers in late 2008, adding pressure on policy makers to take emergency actions to revive the country`s growth. India`s economic difficulties are widely regarded as self-inflicted. Although Delhi often blames the eurozone sovereign debt crisis for India`s woes, domestic economists argue that greater faults lie with those running the world`s largest democracy.

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05.05.2012 16:52 World Economy Review - April 2012

The International Monetary Fund raised its global growth forecast for the first time in more than a year, with the U.S. boosting the outlook while recent improvements remain “very fragile.” The world economy will expand 3.5 percent this year, compared with a January projection of 3.3 percent, the Washington-based IMF said in its World Economic Outlook. It sees growth of 4.1 percent in 2013, up from 4.0 percent. It raised its forecasts for the U.S. to gains of 2.1 percent this year and 2.4 percent in 2013.
“Improved activity in the United States during the second half of 2011 and better policies in the euro area in response to its deepening economic crisis have reduced the threat of a sharp global slowdown,” the IMF said in a summary of the report. “Weak recovery will likely resume in the major advanced economies, and activity is expected to remain relatively solid in most emerging and developing economies. However, the recent improvements are very fragile.”
The report reflects the IMF`s view that the euro area, while still facing an economic downturn and the “hard to quantify” potential risk of a country`s default, has stabilized since last year. The euro area economy is projected to decline by 0.3 percent in 2012, an improvement from the 0.5 percent in the IMF`s previous forecast.
“The most immediate concern is still that further escalation of the euro-area crisis will trigger a much more generalized flight from risk,” the IMF said. “Geopolitical uncertainty could trigger a sharp increase in oil prices.” A 50 percent increase in the cost of oil would reduce global output by 1.25 percent, according to the report.
Japan is projected to grow 2.0 percent this year. Advanced economies, which include the U.S., the euro area, Japan, the U.K. and Canada, will grow 1.4 percent this year and 2 percent in 2013, the IMF said. Those are up from 1.2 percent and 1.9 percent in the January forecasts. So-called emerging and developing economies will expand by 5.7 percent in 2012 and 6 percent next year, up from earlier projections of 5.5 percent and 5.9 percent.
The IMF forecast a 1.8 percent economic contraction in Spain, worse than the 1.6 decline the lender projected in January, according to the report. Spanish Prime Minister Mariano Rajoy said yesterday that the country must slash its budget deficit to maintain access to financing, as bond yields rose to the highest level since his government came to power four months ago. Italy, where Prime Minister Mario Monti is trying to revamp labor markets to make the economy more competitive, is forecast to contract 1.9 percent this year, better than the 2.1 percent slump the IMF had projected in January, the IMF said.
On China, the IMF said growth in the world`s second-largest economy had “moderated” since mid-2011, “and there is so far little sign of a sharp correction in the potentially overheated real estate sector and most related activities, despite widespread concerns about a hard landing.” After 8.2 percent growth for China this year, the IMF forecasts an 8.8 percent expansion in 2013.
“The potential consequences of a disorderly default and exit by a euro area member are unpredictable and thus not possible to map into a specific scenario,” the IMF said. “If such an event occurs, it is possible that other euro area economies perceived to have similar risk characteristics would come under severe pressure as well, with a full-blown panic in financial markets and depositor flight from several banking systems.”
On consumer prices, the IMF projects a 1.9 percent increase this year in advanced economies and 1.7 percent in 2013. Those are higher than the 1.6 percent and 1.3 percent the lender forecast in January. In emerging and developing countries, inflation will be 6.2 percent this year and 5.6 percent in 2013.

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05.04.2012 15:34 World Economy Review - March 2012

Fitch Ratings has come out with its report on `global economic outlook`. According to the rating agency global economy is on the modest recovery path. Fitch Ratings forecasts that the economic growth of major advanced economies (MAE) will be modest at 1.1% in 2012, followed by gradual acceleration to 1.8% in 2013. Compared with the previous Global Economic Outlook (GEO), published 12 December 2011, short-term risks to the global economy have lessened and growth trajectories of MAEs are more divergent. Fitch`s global growth forecast is 2.3% for 2012 and 2.9% in 2013, compared with 2.4% and 3.0% previously.
Weak Outlook in Europe: Given the 0.3% qoq decline in Q411 and weaker recent PMI indicators, a recession in H112 is now likely. Real GDP is projected to contract 0.2% in 2012, and grow by 1.1% in 2013, amidst higher dispersion among larger member states. Downside risks remain though. Fiscal consolidation and tighter credit conditions are key obstacles to growth. For Italy and Spain, Fitch forecasts 2012 GDP to contract 1.6% and 1.0% respectively. For Germany and France positive growth of 0.7% and 0.3% is expected.
Solid Growth in the US: Recovery in the US is gaining momentum, with qoq growth rates of 0.5% and 0.7% in Q311 and Q411 respectively. Growth is supported by the stronger-than-expected improvement in labour market conditions and indicators pointing to strengthening business and household confidence. Fitch has upgraded its 2012 US growth forecast by 0.4ppts to 2.2%, whilst keeping the 2013 forecast unchanged at 2.6%. For Japan and the UK, Fitch projects GDP to increase 1.9% and 0.5% respectively for 2012.
Emerging Markets Power Growth: Economic growth of BRIC countries will remain robust over the forecast horizon, well above MAE and global growth. Nevertheless, Brazil in particular, but also China and India slowed during 2011 and China is expected to slow further this year. To acknowledge the increasing weight of BRIC economies in global developments, Fitch is now publishing its world GDP growth forecast on a purchasing power parity basis, along with the market exchange rate based forecast.
Decrease in Tail Risks: Since December 2011, financial tensions in the eurozone have eased, the probability of tail events, with severe global consequences, has declined. Significant downside risks persist. There are two scenarios in the Appendix: a sharp increase in long yields and an oil price shock. Additionally US fiscal consolidation or global imbalances could unwind in a disorderly fashion. Conversely, improvement in private sector balance sheets could generate stronger demand and improved financial conditions could boost confidence.
Loose Monetary Conditions Persist: Fitch maintains that due to the still fragile recovery, monetary tightening is unlikely over the next quarters. Despite recent oil price increases, major central banks will maintain record low interest rates at least until end of 2012. The success of the ECB`s three-year LTRO operations highlights that non-standard measures can contribute significantly to the normalization of financial markets and improve the functioning of monetary transmission mechanism.
India appears to be reaching the bottom of the current economic cycle. Real GDP grew just 6.1% yoy in Q411, down from 6.9% yoy in Q311. A breakdown by expenditure shows that domestic demand appears to have stabilized as private consumption rebounded, rising 6.2% yoy in Q411, compared to a 2.9% yoy increase in Q311. Equally vital, fixed investment fell 1.2% yoy in Q411, following a 4.0% yoy decline in Q311. Up-to-date high frequency indicators also paint an encouraging picture. Industrial production unexpectedly increased 6.8% yoy in January compared with a 2.5% yoy rise in December. Manufacturing PMI remains elevated, reaching 56.6 in February, slightly below 57.5 in January. As a consequence, Fitch is forecasting that real GDP could grow around 7.5% in FY2012-13, up from an estimate of 7.0% in FY2011-12.

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07.03.2012 21:48 World Economy Review - February 2012

Average gross domestic product (GDP) growth in the fourth quarter of 2011 in the area of the Organization for Economic Cooperation and Development (OECD) slowed down to a stagnating 0.1 percent from 0.6 percent in the third quarter, the Paris-based organization said.
Quarterly GDP growth in the United States accelerated to 0.7 percent in the fourth quarter of 2011, up from 0.5 percent in the previous three months, while that of Japan shrank by 0.6 percent following a strong technical rebound of 1.7 percent in the July-to-September period, indicated the latest data in a monthly OECD report.
However, quarterly GDP growth in the 17-member Eurozone and the wider European Union as a whole saw their first down by 0.3 percent in both regions since the second quarter of 2009.
Among all major European economies whose data was available, only France registered a 0.2-percent GDP growth in the fourth quarter of 2011, down from 0.3 percent in the third quarter, while Germany and Britain contracted by 0.2 percent and Italy contracted by 0.7 percent.
Year on year, GDP growth in the OECD area stood at 1.3 percent in the fourth quarter of 2011 against 1.7 percent in the previous quarter, the OECD report said. "For the whole of 2011, GDP in the OECD area grew by 1.8 percent, down from 3.1 percent in 2010," the OECD concluded.
The OECD forecasts German GDP growth to slow to 0.4% this year before picking up to 1.9% next year. On a workday-adjusted basis, it expects GDP growth of 0.6% in 2012 and 1.9% in 2013.
Germany`s labor market still remains in relatively good shape, the OECD remarked. This is due to a decline in structural unemployment as well as a significant increase of flexibility in working hours, demonstrating the beneficial effects of past labor market reforms, it reasoned.
Public debt has increased notably in the crisis, but the budget deficit is the lowest among G7 countries, partly due to the strong labor market, the report pointed out. It projected a German public deficit of 1.0% of GDP this year and 0.5% next year.
The weakening of growth in Germany is projected to come mainly from slowing investment and consumption spending, which may temporarily suffer from adverse confidence effects, as well as from weaker trade growth, the report stated.
The OECD forecast HICP harmonized inflation for Germany of 1.6% this year and 1.5% next year. The institution cautioned, however, that its latest forecasts are "surrounded by an unusually high level of uncertainty and, notably, considerable downside risks."
These risks relate mostly to a further significant worsening of the Eurozone debt crisis which would have considerable adverse effects on the domestic banking system, possibly leading to severe constraints on credit supply, the OECD explained. At the same time, growth could also develop more favorably if contagion of the crisis to other countries can be contained, leading to an improvement in confidence, the OECD said.

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03.02.2012 17:51 World Economy Review - January 2012

The International Monetary Fund cut its forecast for global economic growth in 2012 and 2013, citing growing financial strains and rising downside risks as Europe`s debt crisis entered a “perilous new phase.” In an update of its world economic outlook, the Washington-based institution said it expects global output to grow by 3.3% in 2012, down from 3.8% in 2011 and from a September forecast of 4%. Global output is forecast to expand 3.9% in 2013, down from a previous forecast of 4.5%. “Global growth prospects dimmed and risks sharply escalated during the fourth quarter of 2011, as the euro-area crisis entered a perilous new phase,” the IMF said.
The IMF said it now expects rising sovereign bond yields and deleveraging by banks to push the euro-zone economy into a “mild recession” in 2012. It also warned that overly aggressive austerity measures could backfire. The IMF expects the 17-nation euro-zone economy to shrink 0.5% in 2012, followed by growth of 0.8% in 2013. The IMF had previously projected growth of 2.1% in 2012 and 1.5% in 2013.
The report comes a day after IMF Managing Director Christine Lagarde warned that the global economy could slide into a “1930s moment” unless Europe gets a grip on its debt crisis and other economic engines, including the United States and China, meet their responsibilities. Lagarde emphasized the need for stronger, growth-oriented policies, as well as larger firewalls and deeper fiscal integration across the euro zone. Read more about Lagarde`s `1930s moment` warning.
The IMF left its forecast for U.S. economic growth in 2012 unchanged at 1.8%, but pegged 2012 growth at 2.2%, down from an earlier projection of 2.5%. Japan is forecast to rebound from a 0.9% contraction in 2011 to grow 1.7%, down from a September forecast of 2.3%. Japan is forecast to grow 1.6% in 2012, down from the earlier estimate of 2%. The IMF said “sufficient” fiscal adjustment is under way in most advanced economies. It urged countries to let automatic stabilizers - such as unemployment and other benefits - operate freely as long as they can readily finance higher deficits.
Without naming countries, the IMF said nations with very low interest rates or other factors that provide room for maneuver on the fiscal front, including some countries in the euro zone, should reconsider the pace of deficit reduction. At the same time, a lack of a credible, medium-term plan to rein in debt in the United States and Japan provides another downside risk to the global economy, the IMF said. “As long as public debt levels are projected to rise over the medium term, and in the absence of a well-defined and credible fiscal consolidation strategies, there is the possibility of turmoil in global bond and currency markets,” the report said. “A more immediate risk is that an accident-prone political economy will lead to excessive fiscal tightening in the near term in the United States.”
While the IMF slashed growth forecasts for the euro zone, the updated projections “see global activity decelerating but not collapsing,” the report said. The IMF expects most advanced economies to avoid falling back into recession, while emerging and developing economies are forecast to slow from a fast growth pace in 2011. But the report emphasized that the forecast is based on the assumption that euro-zone policy makers intensify their efforts to address the crisis and that policies limit deleveraging by euro-zone banks, avoiding a severe credit crunch.
Overall, emerging and developing economies are forecast to see 2012 growth of 5.4%, down from a September estimate of 6.1%. Growth in 2013 is forecast at 5.9%, down from the September outlook of 6.5%. China is now expected to see growth slow from 9.2% in 2011 to 8.2% in 2012, re-accelerating to 8.8% in 2013. The IMF previously forecast growth of 9% in 2012 and 9.5% in 2013.
The report states that Russia`s GDP growth will slow down in 2012 and 2013. The IMF said that although some imbalances in the Russian economy remain, the country is ready to survive a new crisis and to manage it even better than it did in 2008-2009. The deterioration of the current debt crisis in Europe and a slowdown in the economic growth of the leading developed and developing countries have prompted the IMF revised its forecast on Russia to “less optimistic”. According to the report, Russia`s GDP in 2012 will grow by 3.3% instead of the 4.4% forecast earlier. In addition to that, that the IMF experts predict the country`s budget deficit will grow up to 1.4% of Russia`s GDP.

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