The global economy continues to expand at a moderate pace, with financial stresses in the mature economies remaining a key theme. Last year, global activity was hampered by two large and unforeseen shocks, an oil price spike and the Japanese earthquake. These disruptions added to intensifying tensions in the Euro Area, resulting in below-trend global growth of 3.2% in 2011.
This year, persistent economic weakness in the Euro Area is likely to be a continued drag on the global economic expansion. The perception that there is no clear solution to the deeply-rooted problems of the Euro Area is weighing on confidence in the region and globally. In addition, the Euro Area’s close banking and investment linkages with other economies have adversely impacted financial conditions elsewhere, most notably in Emerging Europe and Emerging Asia. The Euro Area itself is likely to experience a mild recession this year, before resuming a sluggish growth path. In our projections, Euro Area weakness is the main reason why we see global growth slowing to just below 3% this year before reaccelerating to nearly 4% in 2013. Some notable features of the current expansion include:
- There is a persistent divergence between weak performance in mature economies and solid performance in emerging economies. Mature market growth will average about 1.5% in 2012-13, which is below the previous trend growth rate. As a result, large negative output gaps that opened up in 2008-09 will persist and in some cases increase further. Growth in emerging economies will also be close to the previous trend (averaging almost 6% in 2012-13).
- Emerging Asia has led the global expansion, and will continue to do so.
- Inflation pressures will remain subdued in mature economies and have recently subsided somewhat in many emerging economies. Policy rates in mature economies are firmly held close to the zero lower bound, while emerging economies have considerable leeway to accommodate a deceleration in economic activity if necessary.
- Further downside risks in the global economy relate to credit problems lingering from the last cycle. Bank de-leveraging remains a key constraint, especially as banks respond to tougher regulatory guidelines. Large budget deficits will be cut, often under market duress.
- Excessive private sector credit growth bears watching in many large emerging economies. The combination of favorable investor sentiment, a global policy push to promote emerging market domestic demand, and low starting levels of business and household leverage could combine to produce credit accidents, especially as the cycle matures in 2014-15.
2011 Fall Economic Advisory Committee in Beijing
October 24, 2011 — The Institute held its Fall 2011 EAC meeting in Beijing on October 24 and 25, 2011. The event, hosted by China International Capital Corporation (CICC) was attended by about 60 economists and country risk officers from around the world. The rise of China in the global economy received particular attention, with experts from private, government and international institutions contributing to our “China Roundtable”.
Global Macroeconomics Publications
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May 2012 Global Economic Monitor
May 18, 2012Tensions in the Euro Area are coming to the fore again forcefully after a relatively calm first quarter. Market sentiment has taken a turn for the worse, driven by election outcomes, renewed concerns about the health of the Spanish banking sector and discussions about Greece leaving the Euro Area. In general, these developments fit into our storyline that continued concern about the Euro Area crisis is keeping European growth moderate and volatile for the foreseeable future. However, while fiscal consolidation and tight credit conditions will limit the upside for growth, each bout of risk aversion poses a test to the lower growth bound, notably now the scenario of a Greek exit from the monetary union.
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2012 April Euro Area Economic Forecast
April 24, 2012Although a number of recent policy actions in the Euro Area have so far prevented a more pronounced downturn, the region remains in a mild recession. On the expenditure side, domestic demand continues to be a drag, somewhat mitigated by a positive net export contribution. On the production side, contraction in manufacturing slightly decelerated in Q1, as suggested by industrial production and surveys. In Q1 the manufacturing PMI averaged above Q4, although it still remains below the growth threshold. Construction is likely to have declined in Q1 due to the bad weather. Going forward, we have slightly lowered our growth forecast over the medium term, reflecting continued uncertainty about the crisis evolution. It remains to be seen whether a relapse in the (flash) manufacturing PMI index (in April it fell to 46, its lowest level since 2009Q2) translates into a lasting weakness throughout Q2.
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2012 April Japan Economic Forecast
April 24, 2012The latest data releases have prompted us to revise up Japan’s Q1 GDP estimate to 3.5%q/q saar, mainly on the stronger than expected net export volumes and auto sales. Additionally, businesses became notably more upbeat toward the end of 2012Q1. The manufacturing PMI increased to 51.1 in March, its highest level since August 2011. The services PMI continued also to rise. Encouragingly, core domestic private machinery orders rose for the second consecutive month in February, somewhat easing the concerns over business investment resulting from the Q1 BoJ Tankan survey results.
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2012 April U.S. Economic Forecast
April 24, 2012Since early 2012, there has been a significant divergence between strong labor market data and weak spending data. This gap made it more difficult to gauge the underlying momentum in the economy. In recent weeks, this gap has begun to narrow. As envisioned in our forecast, expenditure data have been revised up and employment growth appears to have slowed somewhat. Our estimate for 2012Q1 GDP growth is thus unchanged at 2.5%, saar. For the rest of the year, better sentiment has prompted us to make minor upward revisions to our growth forecast. We now project a slight acceleration in Q2 and Q3 that would bring growth above the 2.5% q/q, saar, average of the prior three quarters. Towards the end of the year, we expect that fiscal policy concerns will again come to the fore.
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April 2012 Global Economic Monitor
April 23, 2012Global financial markets took a turn for the worse going into the second quarter. A string of weaker than expected growth indicators coincided with renewed market risk aversion. Notably, Spanish government bond spreads rose back towards their highs from last autumn. This reflects concerns that we may be in for another round of broad market turbulence as the effects of the LTROs wear off. These developments support our forecast of continued moderate, but fragile global growth. The outlook also continues to be one of divergence—both between mature and emerging markets and among mature economies and, importantly, within the Euro Area.
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Euro Briefing: The Anesthetic Wears Off a Little
April 13, 2012Developments since the last Euro Briefing underline that the resolution of the Euro Area crisis will be protracted and painful: Greece is completing a debt exchange that involves large write offs for bondholders, but which was overwhelmingly voluntary in nature; the ECB’s balance sheet has ballooned to more than 30% of GDP; there is renewed concern in the situation in Spain; and there is significant political uncertainty with both Greek and French elections to be held on May 6th.
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Emerging Markets Bank Lending Conditions Survey - 2012Q1
April 09, 2012The IIF index of emerging market bank lending conditions (EMLC) remained below 50 (implying an overall deterioration) for the third consecutive quarter. That said, however, the global EMLC index recovered most of the previous quarter’s drop, rising 48.6, from 44.7 in 2011Q4 and 49.1 in 2011Q3. This change was mainly the result of funding conditions, which tightened somewhat further in 2012Q1, but by nowhere near the amount recorded in 2011Q4. This highlights the fact that policy measures taken by central banks in both emerging and, especially, in mature economies in recent months (especially by the ECB) have helped stem the deterioration.
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