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Global Forecasting Service

Global outlook summary (Forecast closing date: February 10th 2012)

World economy Risks to the global economy are moderating, thanks to an easing of financial strains in the euro zone since the start of 2012. The Economist Intelligence Unit’s forecast of a global slowdown is essentially unchanged since last month, but we have adjusted our view on Europe and now expect less of a contraction in euro zone GDP in 2012. We also think a break-up of the euro zone is slightly less likely than before, though sentiment remains acutely vulnerable to a reversal. World GDP will grow by 3.1% at purchasing-power parity (PPP) in 2012. Although preferable to the dire consequences of financial meltdown in Europe, this by no stretch of the imagination qualifies as a robust performance. Growth will still be slowing for a second consecutive year, and trading conditions remain challenging. The world’s largest and most advanced economies will, as a group, expand by little more than 1% this year. Non-OECD markets will fare better, but they will still feel the effects of the recession in Europe on demand for their exports. We do, however, expect world GDP growth to pick up to nearly 4% in PPP terms next year, as the euro zone returns (just barely) to growth and as emerging markets regain some zip. The European Central Bank has eased financial pressures with loans to banks worth €489bn

2012: AT A GLANCE World GDP growth, at PPP 3.1% World inflation (av) 3.1% Oil/barrel (av, Brent) US$110 US$:€ (av) 1.28 © The Economist Intelligence Unit Limited 2012

The most significant development in recent weeks has been the positive impact of the injection of nearly half a trillion euros into the banking system by the European Central Bank (ECB) in December. The ECB’s offer of cheap and unlimited three-year loans to euro zone banks reduced funding pressures and caused government bond yields in Italy and Spain, in particular, to fall—making those countries’ debt dynamics look less unsustainable. By early February interest rates on routine loans between commercial banks, a measure of stress in financial markets, were at their lowest level in more than a year. These events have reduced pressures in the US, which has very close financial ties with Europe. The ECB is due to offer another round of three-year loans at the end of February. In light of the ECB’s actions, and the response of markets, we have lowered the probability of a break-up of the euro zone from 40% to 30%. That we still attach a nearly one-in-three chance to such a disaster underlines our view that the existential threat to the single currency has not passed. The latest anxious negotiations over Greece’s bailout, and the associated scenes of violent protest, offer a reminder that any number of trigger points could cause a sudden deterioration in investor sentiment. A break-up of the euro zone would lead to a depression in Europe and a serious recession for the rest of the world. All of this means that 2012 will be an unsettled year for the global economy, further delaying what has already been a slow recovery from the 2008-09

Global Forecasting Service March 2012


Global outlook summary

sion. In addition to the challenges facing Europe, the US economy remains in poor shape by historical standards, despite a stream of improving indicators; with petrol prices rising again, consumer and business confidence could easily fade. China is also slowing, creating challenges as policymakers seek to keep growth in the world’s second-largest economy on track. Italy: 10-year government bond yield, % 8.0





Feb 2011











Jan 2012


Source: Haver; Reuters.

Developed world Economic data in the US have been modestly encouraging

The US economy is showing progress on numerous fronts, and is now clearly in no immediate danger of renewed recession unless the euro collapses. Growth in the fourth quarter of 2011, at an annual rate of 2.8%, was the strongest in 15 months. Consumers have shown an increased appetite for spending and borrowing, and the jobs market has been improving fitfully—although unemployment remains far too high. We maintain our forecast for real GDP growth of 1.8% in 2012. Although the US’s underlying economic problems remain far from resolved, we even see some upside risk. If we modify our forecast for the US in the coming months, it will probably be to raise our outlook for growth.

The recession in the euro zone in 2012 will be milder than previously forecast

In the euro zone, we now expect a milder recession in 2012. This reflects better data in Germany as well as the salutary effects of the ECB’s lending programme, which will ease credit strains and thereby boost growth prospects. We have revised our GDP forecast for 2012 to a 0.7% contraction, whereas previously we were expecting a fall of 1.2%. Nonetheless, the environment remains extraordinarily difficult. Debt levels in many euro member states are very high, and fiscal austerity will act as a drag on growth. Japan’s growth in 2012 will get a boost from reconstruction following the earthquake and tsunami that struck the north-east coast in March last year. After a contraction of 0.4% in 2011, real GDP will grow by nearly 2% this year. But the economy still faces significant short-term headwinds, as weak global demand and a relentlessly strong yen are making life hard for exporters. Supply chains have also been disrupted by the recent severe flooding in Thailand. The longerterm economic dynamics remain poor, reflecting deflationary pressures, weak public finances and an ageing population.

Global Forecasting Service March 2012

© The Economist Intelligence Unit Limited 2012

Global outlook summary


Emerging markets Most developing economies are in the midst of a painful adjustment to reduced demand from their customers in the West, although this will be tempered somewhat by domestic prospects. In Asia and Australasia (ex Japan), regional economic growth will slow from 6.5% in 2011 to 6% this year. Yet the region will remain the fastest-growing, largely because China is unlikely to experience a hard landing. More worrying signs are emanating from India, which is relatively sheltered from global headwinds but faces a year of economic weakness as it struggles with inflation and political paralysis. We expect Indian GDP to expand by just 6.3% in 2012, although growth will rise above 8% again thereafter. The recovery in eastern Europe is losing impetus

The euro zone crisis is raising serious concerns about economic prospects in eastern Europe. The recovery has lost momentum in recent months, and growth will weaken further as the region’s most important market and source of investment sinks into recession. As external conditions deteriorate, domestic demand will remain too weak to pick up the slack. Overall, we expect regional growth to slow from 3.7% in 2011 to 2.3% in 2012. Several countries—including Hungary, Slovenia and Croatia—are likely to tip into recession. Russia’s reliance on oil and gas revenue will provide some insulation from problems in western Europe; its growth prospects will continue to depend on world commodity prices. Latin America faces a second year of economic slowdown in 2012, with regional growth set to weaken to 3.6% in the context of contracting demand in the euro zone and tepid US growth. In response to the deteriorating outlook, the central focus of Latin American policymakers is shifting from preventing overheating to supporting growth. Provided that the global slowdown is not too protracted, sound macroeconomic policies, resilient domestic demand and robust Asian demand for commodities will mean that Latin American growth starts to accelerate again next year. Economic growth will accelerate in the Middle East and North Africa in 2012, bucking the trend elsewhere in the emerging world. The region is bouncing back from the impact of the Arab revolutions, which caused sharp downturns in countries directly affected by the unrest. The regional recovery should gather pace in 2012, as still-high oil prices, expansionary fiscal policy, massive infrastructure development in Saudi Arabia and surging growth in Libya boost regional GDP by 4%. But there are many risks to this broadly positive outlook, including tensions between Iran and the West and the escalating conflict in Syria. In Sub-Saharan Africa, economic prospects for most countries are worsening as the West stumbles and China slows. We expect regional GDP growth to slow from 4.4% to 3.8% this year.

Exchange rates The dollar’s recent depreciation is likely to prove temporary

© The Economist Intelligence Unit Limited 2012

The US dollar has lost ground against the euro in recent weeks as global investors have regained their appetite for risk. The ECB’s injection of liquidity into euro zone banks in December was a key factor behind the market’s shift in direction, and by February 9th the dollar was trading at around US$1.32:€1,

Global Forecasting Service March 2012


Global outlook summary

down from US$1.27:€1 in early January. However, the rise in the value of the euro is not likely to continue. Although investors are desperately searching for yield, which is positive for risk assets, we expect the dollar to strengthen on average against the euro this year, to US$1.28:€1. The US’s better growth prospects, and differences in its monetary-policy outlook compared with the euro zone, also point to dollar strength.

Commodities The political risk premium relating to Iran has led us to raise our oilprice forecast

We have raised our oil-price forecast this month, and now expect dated Brent Blend to average US$110/barrel in 2012, up from US$100/b in our previous forecast. This reflects the supply risks hanging over the market. Tensions between the West and Iran have escalated in recent weeks with the imposition of US sanctions on Iran’s central bank and the EU’s embargo on Iranian oil, effective from July 1st. We think that Iran will find alternative markets (in Asia and Turkey) for most of the oil that usually goes to Europe, and that Russian and Saudi crude will be redirected towards Europe. However, the transition may be disorderly, and fears of disruption will lead to a risk premium in the oil market. Other commodity markets will benefit from loose global monetary conditions and investors seeking return in 2012. However, more subdued consumption growth as the Chinese economy slows, and improvements in the supply of many commodities, will lead to somewhat weaker prices. Our industrial-raw materials index will fall by 13% this year, for example.

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 4.0 1.9 2.2 3.0 14.2 7.5 9.3 5.6 4.9 7.0 3.4 7.1

2.5 1.3 -0.3 -1.1 0.3 9.6 4.6 5.7 4.0 5.3 4.8 4.9 2.8

-0.8 -2.4 -3.5 -5.5 -4.2 9.2 -5.7 5.2 -2.0 1.5 1.1 1.5 -12.0

5.0 4.0 3.0 4.5 1.8 10.4 3.3 8.3 5.9 4.1 4.4 3.0 14.1

3.7 2.6 1.7 -0.4 1.5 9.2 3.7 6.5 4.2 3.2 4.4 3.9 5.8

3.1 2.0 1.8 1.9 -0.7 8.2 2.3 6.0 3.6 4.0 3.8 3.1 4.0

3.9 2.7 2.0 1.4 0.5 8.5 3.4 6.8 4.2 4.1 4.8 3.2 5.6

4.1 2.9 2.2 1.5 1.2 8.0 3.8 6.6 4.3 4.8 4.6 3.2 6.2

4.3 3.1 2.3 1.6 1.5 8.0 3.8 6.6 4.1 4.9 4.8 3.2 6.5

4.3 3.0 2.3 1.4 1.6 8.0 3.8 6.5 4.2 4.9 5.0 3.2 6.7

72.71 11.3 30.9

97.66 -5.3 28.1

61.86 -25.6 -20.3

79.63 45.4 10.7

111.01 21.6 30.1

110.00 -12.9 -11.7

103.63 4.2 -6.5

108.25 -2.7 -4.4

104.00 1.2 5.3

110.00 2.2 3.3

118 1.37

103 1.47

94 1.39

88 1.33

80 1.39

77 1.28

80 1.24

81 1.23

82 1.24

83 1.26

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

Global Forecasting Service March 2012

© The Economist Intelligence Unit Limited 2012

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