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Global Forecasting Service

Global outlook summary (Forecast closing date: September 12th 2011)

World economy A sharp escalation in the euro zone debt crisis is sending shock waves through the global economy, depressing sentiment and raising the risk of another recession. With markets volatile, financial and economic uncertainty is at its highest level since the grim days of late 2008. The Economist Intelligence Unit’s global growth forecast remains little changed since last month, when we substantially cut our projections. We have, however, lowered our forecast for euro zone growth a bit further. We expect the world economy to expand by 3.6% on a purchasing-power-parity basis this year and by 3.4% in 2012. This compares with almost 5% last year, when concerted stimulus boosted growth. The global economy was always likely to slow once this stimulus wore off, especially as exceptionally low interest rates in the US and the need for fiscal austerity in many countries limit the scope for further policy action. However, a series of shocks and policy blunders have conspired to make a difficult situation worse, resulting in an erosion of confidence that has been deeper and more damaging than expected. These disruptions have included the crisis in the euro zone, political wrangling over the debt ceiling in the US, war and political unrest in the Middle East and North Africa, and natural disaster in Japan. The surge in global oil prices earlier this year was also a serious shock to many economies. All these factors have contributed to either fundamental or sentiment-driven falls in supply and demand. The debt crisis in the euro zone is threatening the global economy

2012: AT A GLANCE World GDP growth, at PPP 3.4% World inflation (av) 2.9% Oil/barrel (av, Brent) US$94.5 US$:€ (av) 1.36 © The Economist Intelligence Unit Limited 2011

Of the above issues, we consider the euro zone debt crisis to be, by far, the most serious threat to the global economy. The risk of huge financial losses for holders of, say, Greek or Italian government bonds is alarming markets and causing large declines in equity prices. The uncertainty over which banks are most exposed is causing financial institutions to hoard cash, leading to rising pressures in funding markets. The financial system is transmitting these concerns to the rest of the world, especially the US. Most worrying, a lack of political leadership in Europe has reduced prospects for a quick resolution of the crisis. What do these troubles mean for our forecast? For now, we still believe that the global economy, and the US and the euro zone in particular, will avoid an outright contraction in GDP. But economies are on a knife’s edge, and a further deterioration of the euro zone’s debt prospects, or another round of politically driven fiscal warfare in the US, could drive consumers and businesses to the sidelines for an extended period, pushing either or both economies into recession. As we mentioned in last month’s forecast, we also believe that the risk of a break-up of the euro zone is now very high.

Global Forecasting Service October 2011


Global outlook summary

Developed world The economic recovery in the US has stuttered badly in 2011. Growth was weak in the first half of this year, and job creation has stalled. Several temporary factors have contributed to the slowdown, including high petrol prices, disruption to supply chains stemming from the Japanese natural disaster, and political wrangling over the federal debt ceiling. Although there may be a slight improvement in the economy in the second half of the year—thanks to lower oil prices, among other factors—any pick-up is unlikely to be stellar. We forecast real GDP growth of 2% in 2012, up from 1.6% this year. President Barack Obama’s US$447bn jobs plan is likely to have some positive impact on the economy next year, however. The Japanese economy is getting back on its feet after the March disaster

Japan is returning to some semblance of normality following the earthquake and tsunami that struck its north-east coast on March 11th. Post-disaster reconstruction is starting to boost the economy, and this will continue in 2012. However, the closure of power plants after the disaster in March seriously disrupted energy supplies, and there remains an ongoing risk of energy shortages that would hamper the efforts of Japan’s heavy manufacturers to resume normal operations. At the same time, the strength of the yen—which has been boosted by global risk aversion—is making life tough for exporters. We forecast strong GDP growth of 2.3% in 2012, but growth will slow significantly thereafter as the underlying economic problems of the past have not gone away. There has been no let-up in the euro zone crisis. Financial markets are increasingly of the view that the only possible outcomes are fiscal integration or a break-up of the euro zone. One of the most worrying developments is that concerns have spread from the so-called “periphery” to the much larger economies of Spain, Italy and, to some extent, France. Growth prospects are dimming. We have cut our forecast further in response to weaker data (even in strong countries like Germany), the escalation of the debt crisis, and additional fiscal tightening announced by stressed countries such as Italy and Spain. We now expect real GDP growth of 1.6% this year and just 0.8% in 2012.

Emerging markets Chinese growth will slow to 8.6% in 2012

Economic growth is slowing in most emerging markets. In Asia, second-quarter GDP data revealed a loss of momentum across the region, with export-dependent economies suffering the most. Given the troubled outlook for the US and Europe, there is now a danger that Asian economies will experience more than just a benign slowdown in the next year or so. Still, the region’s economic fundamentals remain solid. Growth in China will ease to a still-robust 8.6% in 2012, while India’s economy will expand by 8.2%. Latin American economies are decelerating after a strong rebound last year. High commodity prices and strong domestic demand have necessitated interestrate hikes to ward off higher inflation—although monetary tightening may now be on hold. Strong capital inflows are supporting consumption and investment, but may also inflate asset prices and damage export competitiveness. Given the

Global Forecasting Service October 2011

© The Economist Intelligence Unit Limited 2011

Global outlook summary


slowdown in the global economy, we have cut our forecast for Latin American growth in 2011 from 4.2% to 3.8%. Growth will continue at roughly the same pace next year. Also notable is that the region’s traditional two-speed pattern is re-emerging. Commodity exporters such as Brazil, Peru and Chile will perform strongly in the next few years, thanks to buoyant Asian demand. But much of the rest of the region, especially countries with closer ties to the stuttering US economy, will grow more weakly. The recovery in eastern Europe continues, but growth in many countries is slackening. Consumer and business sentiment remains fragile. Financial investors’ earlier expectations that the region would be resilient to troubles in the euro zone now look misplaced, and currency and bond markets are vulnerable to contagion. Nonetheless, the region as a whole is on course to register GDP growth of 3.9% in 2012. A wave of civil unrest and the war in Libya have depressed economic prospects in the Middle East and North Africa (MENA). In aggregate, GDP growth in MENA will decline to 3.3% in 2011 before picking up to 4.1% next year—assuming that major political turmoil subsides. Despite the darkening global outlook, economic growth in Sub-Saharan Africa will strengthen to 5.1% in 2012. The region’s resilience is rooted in strong commodity prices, economic reforms, and healthy capital and investment inflows—especially from Asia.

Exchange rates The Swiss National Bank stunned markets by moving to cap the franc

Currency markets have become more volatile. The weak global economy and the crisis in the euro zone have boosted demand for safe-haven currencies, causing the Japanese yen and the Swiss franc to soar. This has fuelled concerns in Japan and Switzerland about a loss of export competitiveness, and on September 6th the Swiss central bank took the extraordinary step of capping the franc at Swfr1.20:€1. Switzerland’s action raises the risk of a return to the socalled currency wars that erupted last year, when some emerging markets, led by Brazil, complained that weak-currency policies in the developed economies were driving up their own exchange rates. The dollar/euro exchange rate has also seen increased movement lately. After more than five months of trading in Swiss franc:euro, 2011 1.35

Swiss National Bank sets ceiling of 1.20

1.30 1.25 1.20 1.15 1.10 1.05 1.00 Jan









Source: Haver Analytics.

© The Economist Intelligence Unit Limited 2011

Global Forecasting Service October 2011


Global outlook summary

the range of US$1.40-1.45:€1, the dollar climbed to about US$1.37:€1 in early September. We expect the dollar to strengthen gradually against the euro over the next five years.

Commodities Oil prices will ease in 2012

Prices for many commodities have rebounded from their early-August sell-off, but we still expect prices in general to be lower in the second half of this year than in the first, as slower economic growth reduces demand. Prices will soften further in 2012 owing to weak consumption growth and, depending on the commodity, some improvement in supply. This will more than offset other factors, such as low global interest rates and a loss of confidence in government debt and global currencies, which are likely to be supportive of commodity prices. Oil prices will remain volatile in the coming quarters, but should ease from current levels. We forecast that Brent crude (dated Blend) will average US$94.5/barrel in 2012 and US$90/b in 2013. Thereafter, higher-cost unconventional oil from non-OPEC sources, such as Brazil and Canada, will be needed for supply to keep pace with demand—boosting Brent crude prices again, to an average of around US$100/b by 2016.

World economy: Forecast summary Real GDP growth (%) World (PPP* exchange rates) World (market exchange rates) US Japan Euro area China Eastern Europe Asia & Australasia (excl Japan) Latin America Middle East & North Africa Sub-Saharan Africa World inflation (%; av) World trade growth (%) Commodities Oil (US$/barrel; Brent) Industrial raw materials (US$; % change) Food, feedstuffs & beverages (US$; % change) Exchange rates (av) ¥:US$ US$:€











5.2 3.9 1.9 2.3 2.9 14.2 7.6 9.3 5.6 5.0 7.2 3.4 7.1

2.6 1.4 -0.3 -1.2 0.3 9.6 4.5 5.7 4.0 5.4 7.0 4.9 2.7

-0.9 -2.5 -3.5 -6.3 -4.2 9.2 -5.6 5.1 -2.1 1.5 0.9 1.6 -11.7

4.9 3.9 3.0 4.0 1.7 10.3 3.3 8.3 5.9 4.1 4.4 3.0 13.6

3.6 2.5 1.6 -0.2 1.6 9.0 3.6 6.7 3.8 3.3 4.4 3.8 7.7

3.4 2.4 2.0 2.3 0.8 8.6 3.9 6.5 3.7 4.1 5.1 2.9 5.7

4.1 3.0 2.0 1.3 1.4 8.4 4.1 6.7 4.2 4.5 4.9 3.1 6.3

4.2 3.0 2.2 1.2 1.7 8.2 4.1 6.7 4.3 4.9 4.6 3.2 6.3

4.3 3.1 2.4 1.3 1.8 8.2 4.0 6.8 4.0 4.8 4.9 3.2 6.6

4.2 3.0 2.3 1.1 1.7 8.0 4.2 6.5 4.2 4.9 5.0 3.4 6.5

72.71 11.3 30.9

97.66 -5.3 27.8

61.86 -25.6 -20.3

79.63 45.4 10.7

110.00 27.0 31.8

94.50 -7.2 -11.1

90.00 -5.5 -7.9

91.75 -3.1 -1.5

97.75 0.5 0.9

100.00 3.4 2.5

118 1.37

103 1.47

94 1.39

88 1.33

80 1.41

81 1.36

81 1.28

82 1.23

84 1.28

83 1.28

* PPP = Purchasing-power parity. Source: Economist Intelligence Unit.

Global Forecasting Service October 2011

© The Economist Intelligence Unit Limited 2011