The global economic outlook has weakened further. Mounting evidence of softer-than-expected demand in the developed world has been compounded by a slide in confidence and the return of financial market instability in recent months, according to BofA Merrill Lynch, report.
“The global economy also faces its most significant challenge since the banking crisis of 2008. The Eurozone sovereign debt crisis is no closer to a permanent solution in October 2011 than when it began last year. In this environment there are growing concerns about contagion from the fringes to other (larger) Eurozone economies and to the fragile EU banks. Measures agreed at the EU Summit in late October, including boosting the European Financial Stability Fund, a 50% write-off on Greek debt, bank recapitalisation and structural reforms in countries at the forefront of the crisis, have temporarily addressed market fears, but not resolved the issue,” the report said.
The latest data also points to some softening in demand in emerging markets. These dynamic economies have led the developed world in the early stages of recovery and remain favourably placed to weather the current market storms. But business confidence and trade figures have dipped in recent releases, fuelling concern that the current slowdown will not be isolated to Europe and North America.
Forecasts for 2011 have been downgraded in the last quarter for virtually every major economy, with the US seeing a particularly sharp reduction. However, the implication is that the current slowdown will be a pause rather than a ‘double dip’, with recovery resuming in the second half of next year. IHS Global Insight predicts broadly stable global GDP growth in 2012 (at 3.0%).
The risks around the central forecast profile have also increased and are currently weighted to the downside. Conditions for lasting global recovery, most notably healthy corporate sector finances, remain in place, but confidence will need to be rebuilt before growth can accelerate again. The resolution of the Eurozone’s crisis is likely to be a prerequisite for this. Although the recently announced framework at the EU summit seems to have restored some confidence in the region, further policy action may also be necessary to re-start the recovery, and some governments have already moved in this direction.
Forecasts point to a continued divide in the pace of growth between advanced and emerging economies. Growth in the advanced economies is projected to average just 1.5% per year during 2011-12, half as strong as last year’s expansion and particularly unspectacular when compared with the around 6% growth forecast for the emerging economies.
Recent economic indicators have been particularly disappointing in the United States, where demand is struggling against a background of weak sentiment, high unemployment and faltering housing markets. Despite a timely policy response to poor data – with the implementation of new monetary action in the form of the Fed’s ‘Operation Twist’ stimulus and smarter attempts to assist a housing market recovery – the downward revisions to growth forecasts have been more significant than in any major economy. IHS Global Insight expects US growth to reach only 1.7% in 2011, before declining to 1.4% in 2012.
GDP growth in the Eurozone has abruptly decelerated and other activity indicators have worsened markedly in Q3 as the sovereign debt crisis has undermined confidence. The stark divide between north and south Europe (notably the fringe) is expected to be maintained over the next 12 months. However, a sharp slowdown is also in prospect for Germany, ending its striking post-recession resurgence. As a result, Eurozone GDP growth is projected to drop from 1.6% this year to under 0.5% next. The UK is currently struggling against the headwinds of a domestic fiscal squeeze and global weakness. Activity is predicted to be a disappointing 0.9% in 2011, with the outlook for next year only slightly better. This rate is still far below trend and leaves UK output levels well adrift of the peaks of the last boom.
In Japan, the latest data indicates that growth has slowed after initial recovery from its disasters. Although continued reconstruction means the forecast is for a strong Japanese rebound next year (with growth of 2.7%), the latest estimate has been pushed lower and there remain downside risks given the fragile global environment.