Global Economy Reviews

30.12.2012 19:38 World Economy Review - December 2012

Fitch Ratings says that the contraction of the eurozone and Japanese economy as well as weaker than expected growth in large emerging countries such as Brazil and India in Q312 highlight the underlying weakness and downside risks facing the global economy. In its latest quarterly Global Economic Outlook (GEO) Fitch forecasts global growth of 2.0% in 2012, 2.4% in 2013 and 2.9% in 2014 (based on market exchange rates), down from 2.1%, 2.6% and 3.0% respectively in the previous GEO.
The agency forecasts growth of just 0.9% for major advanced economies (MAE) in2012, followed by only a modest and gradual acceleration to 1.2% in 2013 and 1.9% in 2014. "Global growth outturns are continuing to undershoot expectations and risk remain skewed to the downside. Although forceful ECB intervention has eased tail risks in the eurozone, it has so far failed to arrest economic stagnation, the looming `fiscal cliff` could tip the US economy into recession, and China faces a challenging transition towards a more balanced growth model," says Gergely Kiss, Director in Fitch`s Sovereign team.
The growth of the US economy accelerated in Q312, but the near-term outlook is complicated by the effect of Hurricane Sandy and the looming `fiscal cliff`. Fitch`s baseline assumption is that the `fiscal cliff` will be avoided, but a fiscal tightening of 1.5% of GDP will materialize. Fitch has maintained its 2013 and 2014 US GDP growth forecasts at 2.3% and 2.8%, respectively, as balance sheet adjustment is progressing in the private sector and accommodative financial conditions can counterbalance current headwinds.
The eurozone entered a recession in Q312, which will likely deepen in the coming quarters. Fitch forecasts GDP to contract by 0.5% in 2012, stagnation (-0.1%) in 2013 before a modest recovery of 1.2% growth in 2014. With economic and financial rebalancing proving longer and harder than anticipated the agency lowered its 2013-14 forecast compared to September`s GEO by 0.4% and 0.2% respectively. Private sector confidence remains weak, unemployment in the region as a whole is already at record high and heading towards 12%, while financing conditions are persistently tight in the periphery and core countries` growth momentum is slowing.
Emerging markets face growing challenges. The combination of weak import demand of MAEs and domestic vulnerabilities has led to a soft patch in Brazil and India this year. In China, Fitch`s base case is that a modest monetary and public-investment stimulus will raise growth in Q412 and support output expansion of about 8% in 2013 and 7.5% in 2014, though risks surrounding the medium-term transition towards a more balanced growth model are substantial.
In this edition of the GEO Fitch has analyzed the global repercussions of a hypothetical hard landing of the Chinese economy in which GDP growth slows to 5% in 2013 and 6.5% in 2014. As China`s role in the global economy has grown rapidly over the past decade, such a shock would slow global growth significantly, to 1.7% and 2.1% in 2013 and 2014, respectively. The largest hit would be in South-East Asia owing to close trade links, while commodity exporters would also suffer from a steep fall in oil and other commodity prices. MAEs would face a more persistent impact from the shock as their domestic policies are heavily constrained in responding to any adverse exogenous shocks. Fitch emphasizes a hard landing is a scenario and not its base case for China`s economy.
Ultra-loose monetary conditions are set to endure in MAEs. Fitch expects major central banks to maintain record low interest rates throughout 2013 and, in line with the Fed`s guidance, beyond 2014 in the US. The ECB`s possible rate cut and lagged effects of previous non-standard measures are unlikely to offset negative economic trends sufficiently to improve the near-term growth outlook.

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03.12.2012 23:44 World Economy Review - November 2012

The OECD slashed its global growth forecasts, warning that the debt crisis in the recession-hit euro zone is the greatest threat to the world economy. In light of the dire economic outlook, the Organization for Economic Cooperation and Development urged central banks to prepare for more exceptional monetary easing if politicians fail to come up with credible answers to the debt crisis.
The Paris-based think-tank forecast in its twice-yearly Economic Outlook that the global economy would grow 2.9 percent this year before expanding 3.4 percent in 2013. The estimate marked a sharp downgrade since the OECD last estimated a rate in May of 3.4 percent for this year and 4.2 percent in 2013.
The euro zone is facing two years of economic contraction, while the United States risks a recession if lawmakers there fail to agree a deal to avoid a combination of tax hikes and budget cuts that will otherwise go into effect next year.
Providing the deadlock in Washington is overcome, the world`s biggest economy will grow 2.0 percent next year, the OECD estimated, cutting its forecast from 2.6 percent in May. "The U.S. fiscal cliff is a very important source of concern, but the greatest downside risk remains the euro zone," OECD chief economist Pier Carlo Padoan told Reuters in an interview.
"The reason for that is not only recession, but also the fact that different negative policy (feedback) loops between sovereign debt, the banking situation and exit risks remain. So the overall zone remains in a state of fragility." Cutting its estimates, the OECD forecast that the euro zone economy would contract 0.4 percent this year and another 0.1 percent next year, only returning to growth in 2014 with a rate of 1.3 percent. The OECD warned that diverging financing conditions within the European monetary union threaten to pull it apart if policymakers fail to get a grip on the debt crisis.
"The euro area, which is witnessing significant fragmentation pressures, could be in danger," Padoan wrote in a foreword to the outlook, urging politicians to overcome deadlock over a single European Central Bank-led bank supervisor.
Given the weakness of the global economic outlook, the OECD warned governments against being too zealous in their belt-tightening efforts and recommended that Germany and China even pursue temporary stimulus spending to revive growth.

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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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