Global Economy Reviews

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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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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