Marking Down Global Growth

Written by Stephen Swanson

In October the IMF marked down its estimates for global growth. In its latest WEO it foresees global growth of 3.3 percent in 2012 and 3.6 percent in 2013, down from 3.5 percent this year and 3.9 percent next year when it made its last report in July. At the time, new estimates suggest a 15 percent chance of recession in the United States next year, 25 percent in Japan and above 80 percent in the euro area.

In late November the Organization for Economic Cooperation and Development has downgraded its projections of global economic growth, projecting global GDP climbing 2.9 percent this year and 3.4 percent in 2013. Those estimates represent significant cuts from the OECD’s May projections of 3.4 and 4.2 percent. And at the same time it reduced its estimates for members of the OECD (which excludes the BRIC’s) to 1.4% for both 2012 and 2013.

Reuters reports Fitch, in its latest quarterly Global Economic Outlook (GEO), has reduced forecasts of global growth to 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. From Reuters:

“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.

The agency forecasts growth of just 0.9% for major advanced economies (MAE) in 2012, 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.”

As if on queue and just days after the Fitch report, the ECB estimated the bloc’s gross domestic product will contract 0.5% in 2012, followed by a 0.3% decline in 2013—a marked reduction from the bank’s forecast three months ago that the euro bloc would grow 0.5% in 2013. Growth will return in 2014, but only at a 1.2% rate, according to the latest forecast.

And on the same day growth estimates for Germany and Austria were lowered. In its semiannual economic projections, Germany’s central bank slashed its forecast for German growth next year to 0.4% from its previous estimate of 1.6% in June. It also lowered its forecast for 2012 growth to 0.7% from 1.0%.

And Reuters reports Austria’s central bank cut its 2013 growth forecast for the country’s export-dependent economy to 0.5 percent from the 1.7 percent it had expected in June, due to the global downturn, weak investment and sluggish consumer spending.

A day earlier (Dec 5th) Britain’s Office for Budget Responsibility took a scalpel to its growth forecasts for the British economy and painted a very sober picture of future growth prospects.

The independent fiscal watchdog now expects the economy to shrink this year by .1% and grow at just 1.2 per cent in 2013, down from its 2 per cent estimate in March. That compares with 0.8 percent growth predicted for this year in March and a 2 percent expansion for next year.

Against this gloomy backdrop, however, PMI’s for China have been improving and other indicators such as electricity consumption and rail freight volume tend to reinforce the view China may have averted a hard landing – at least for the time being. A conservative take may be that China continues to grow – but not at boom pace – as central planners lend support to rural migration to small towns and cities and take other fiscal measures to back growth during a period of economic restructuring.

Similarly, Prime Minister Singh has proposed sweeping reforms for India that would greatly help a country inflicted with endemic corruption, political paralysis and deteriorating growth. The reforms would ease foreign investment and pave the way for foreign companies to operate freely in broadcast, insurance and retail. The reforms, while sorely needed, require parliamentary approval and that is far from assured.

While these rays of light are encouraging, they are shaded by the fact that the trend of forecasts is to the downside and the eurozone slump may last longer than expected as current projections rest on characteristically optimistic assumptions; that the US, UK and Japan are precariously close to stall speed and could easily lapse into recession; the economic mass of the EMU, US, UK and Japan dwarfs that of China and India; and EMU malaise and tail risks will continue to be transmitted through trade and capital flows.

Thus, we should be prepared for a hesitant and uneven period of economic growth over the next two years dominated by downside risk including the much discussed (ad nauseum) fiscal cliff. Perhaps the big takeaway is whether US corporate earnings can continue to grow against this slope of challenge.

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