The global economy remains in precarious shape.
Europe's debt crisis rages on, and although the euro appears
to have survived its most recent test in the form of the
Greek election on June 17th, austerity and financial-market
uncertainty are depressing economic activity in Europe and,
by extension, in much of the rest of the world. The
Economist Intelligence Unit continues to expect global GDP
growth to slow in 2012, and while our forecasts for the G3
economies—the US, euro zone and China—are essentially
unchanged this month, we have cut our projections for Brazil
and India.
We forecast that world GDP, measured at purchasing-power
parity, will grow by 3.2% in real terms in 2012. This would
be down from 3.7% last year and 5.1% in 2010, when
extraordinary stimulus in response to the post-Lehman
financial crisis fuelled a recovery that, in retrospect,
proved all too brief and shallow. Yet policymakers now have
substantially less firepower than they did four years ago,
while past economic excesses (from housing bubbles to rises
in public debt) have fundamentally weakened many countries'
ability to withstand stress.
Given these factors and the continuing fallout from the
downturn in Europe, it is hardly surprising that immediate
growth prospects are poor. Global growth essentially stalled
in the second quarter of 2012, and the outlook for the rest
of the year is hardly better. The continuity in our forecast
for the US, the euro zone and China is less a vote of
confidenceper se than a reflection of the fact that
our outlook was already cautious. In contrast, we have
revised down sharply our 2012 forecast for Latin America,
owing to subdued recent data in Brazil. India's growth
prospects have also weakened markedly. In both countries
domestic policy shortcomings are partly to blame. But, as in
many other markets, the problems in Europe are also having
an impact.
The trajectory of the euro crisis, and the effectiveness
or otherwise of the policy response, will remain critical to
global economic prospects. Fears of a break-up of the
European currency union remain very real, even though the
June 17th re-run of the Greek general election inspired
widespread sighs of relief after political parties more
likely to co-operate with creditors narrowly won the day.
But the crisis in Greece is by no means over, while the
deterioration of the banking crisis in Spain has raised
fresh concerns about financial stability. Spain has become,
in effect, the fourth country to need a European bailout,
having announced that it needed as much as €100bn (US$125bn)
to recapitalise its ailing banks. These funds would add to
the country's public debt and thus increase the risk that
the sovereign itself may need a bailout.
That an economy the size of Spain—which, with GDP of
€1.1trn, is twice as large as the three other bailout
countries combined—is in danger means that the euro zone has
entered a potentially calamitous new stage. Our baseline
scenario, which we consider most likely, is that no country
will leave the euro zone in the next year. This assumes that
Greece forms a coalition government that will do enough to
satisfy creditors, and that the rescue fund for Spain's
banks eases the worst of the crisis in that country.
However, we also envisage a bleaker scenario that begins
with the departure of Greece from the euro zone—which could
happen if a new government failed to renegotiate its bailout
pact. The impact on Greece would be devastating, and would
include massive capital outflows, default on both public and
private debt, and collapse of the banking system. At a
global level, we would expect a massive response to such an
emergency from governments and central banks, but it is
unclear whether this would be enough to limit contagion.
Developed world
The US economy is doing relatively well compared with
Europe, but recent data have been soft. GDP growth in the
first quarter of 2012 was revised down slightly to 1.9% (at
an annual rate) from 2.2% previously. A deceleration in jobs
growth and an uptick in the unemployment rate in May have
compounded the sense that the economy is going through a
sluggish patch. We had already expected a mid-year
deceleration in GDP growth, so we maintain our forecast for
growth of 2.2% in 2012. However, if the weaker trend were to
be sustained well into the third quarter, we would lower our
forecast.
In the euro zone, a combination of austerity, financial
turbulence and low confidence is wreaking economic havoc—and
will continue to do so for some time. We maintain our
forecast for a GDP contraction of 0.7% in 2012, but now
expect an even weaker recovery next year, with growth of
0.3%. Both of these forecast numbers, it should be
remembered, are contingent on the euro zone remaining
intact; in the event of a break-up, the downturn would be
much more severe.
Japan's growth outlook continues to be shaped by the
tsunami, earthquake and nuclear crisis that occurred in
March last year. This caused GDP to contract in 2011, but it
also means that there will be a corresponding pick-up in
growth to 1.7% this year. Post-tsunami reconstruction will
partly support the recovery, although such work has
proceeded slowly so far.
Emerging markets
Emerging markets face headwinds from sluggish US growth
and recession in Europe. Weak global demand poses a
particular challenge to Asia's export-oriented economies,
which must also adjust to slower growth in China. We expect
Chinese GDP to grow by 8.2% this year, thanks to the
government's efforts to avoid a hard landing. But an
impending leadership transition poses political risks, and
short-term stimulus may come at the cost of prolonging
China's unbalanced growth model. In India, fiscal disarray
and political paralysis have taken the shine off an economy
until recently expected to sustain growth rates of 9% or so.
We expect Indian GDP growth of just 6.4% this fiscal year.
Eastern Europe's economic links with the euro zone will
make for a challenging operating environment in 2012. Trade,
investment and bank financing will weaken. Compounding this,
domestic demand remains generally anaemic and few
governments have the fiscal wherewithal to splash out on
stimulus. Although some countries are benefitting from
robust commodity prices, GDP growth in eastern Europe as a
whole will slow from 3.8% in 2011 to 2.5% this year.
Economic growth in Latin America will slow again in 2012,
to 3%. Recession in the euro zone and below-par growth in
the US will hurt the region's exports, although Chinese
demand will continue to benefit South American commodity
producers. Latin America's largest economy, Brazil, has had
a poor start to the year. In light of recent data, we have
cut our 2012 growth forecast from 3.3%to 2.2%, even though
we expect the economy to pick up in the second half of the
year. Latin America as a whole will gain some momentum from
2013, when GDP growth will accelerate to 3.9%.
The Middle East and North Africa are on course for
recovery this year, thanks in part to still-high global oil
prices. There will also be a bounce-back in some economies
affected in 2011 by political upheaval and civil unrest.
However, regional growth will be held back by lower oil
production and economic sanctions in Iran, and by continuing
instability in Syria (and, to a lesser extent, Egypt).
Overall, the region will record GDP growth of 4% in 2012, up
from 3% last year. In Sub-Saharan Africa, the dim outlook
for the global economy poses risks ranging from a worsening
of trade conditions to falling remittances and foreign
investment. The region would also suffer in the event of a
more significant slowdown in China, which has emerged as a
crucial economic partner. GDP growth in Sub-Saharan Africa
will slow slightly to 4.3% in 2012, but medium-term
prospects are positive.
Exchange rates
The US dollar has strengthened significantly against most
currencies in recent weeks as the euro crisis has deepened.
This is a reversal from the pattern early in the year, when
the European Central Bank's injection of over €1trn into the
banking system boosted the "risk on" trade. We continue to
believe that the euro will have little or no upward momentum
this year, and now expect the dollar to be stronger on
average than previously projected—at US$1.28:€1 in 2012.
This does not rule out periodic bouts of euro strength,
particularly if the US recovery disappoints or if
euro-related risk aversion eases temporarily.
Commodities
After a relatively strong start to the year, commodity
prices have been slipping since mid-March. This has
reflected a number of trends, including: concerns about
financial stability in the euro zone; more mixed data
releases out of the US; and distinct signs of a slowdown in
a number of the large emerging economies, including China,
Brazil and India.
Oil prices rose very sharply in the first four months of
2012, but have fallen as supply concerns associated with
Iran's nuclear programme have been overtaken by the prospect
of weaker global demand. To reflect these factors, we have
slightly lowered our oil price forecast this month. We now
expect a barrel of crude oil (dated Brent Blend, the
European benchmark) to cost an average of US$109.5 in 2012,
which is US$3 cheaper than in our previous forecast.
However, we believe that risks to supply remain and that the
market could recover some lost ground if investors' worst
fears about dislocation in the euro zone or a sharp downturn
in China's growth are not realised.
World economy: Forecast summary
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|
2007
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
Real GDP growth (%)
|
|
|
|
|
|
|
|
|
|
|
World (PPP exchange rates) a
|
5.2
|
2.4
|
-0.9
|
5.1
|
3.7
|
3.2
|
3.7
|
4.0
|
4.2
|
4.2
|
World (market exchange rates)
|
4.0
|
1.2
|
-2.4
|
4.1
|
2.5
|
2.1
|
2.6
|
2.8
|
3.0
|
3.0
|
US
|
1.9
|
-0.3
|
-3.5
|
3.0
|
1.7
|
2.2
|
2.1
|
2.1
|
2.3
|
2.3
|
Japan
|
2.2
|
-1.1
|
-5.5
|
4.5
|
-0.7
|
1.7
|
1.2
|
1.6
|
1.2
|
0.9
|
Euro area
|
2.9
|
0.2
|
-4.4
|
1.9
|
1.5
|
-0.7
|
0.3
|
1.2
|
1.5
|
1.5
|
China
|
14.2
|
9.6
|
9.2
|
10.4
|
9.2
|
8.2
|
8.4
|
8.1
|
8.0
|
8.0
|
Eastern Europe
|
7.5
|
4.6
|
-5.7
|
3.5
|
3.8
|
2.5
|
3.3
|
3.7
|
3.9
|
3.8
|
Asia & Australasia (excl Japan)
|
9.3
|
5.5
|
5.0
|
8.4
|
6.5
|
6.0
|
6.5
|
6.5
|
6.6
|
6.5
|
Latin America
|
5.7
|
3.9
|
-2.0
|
6.0
|
4.3
|
3.0
|
3.9
|
4.2
|
4.1
|
4.2
|
Middle East & North Africa
|
4.8
|
4.4
|
1.8
|
4.6
|
3.0
|
4.0
|
4.0
|
4.7
|
4.9
|
4.9
|
Sub-Saharan Africa
|
7.0
|
4.8
|
1.2
|
4.4
|
4.4
|
4.3
|
4.9
|
4.6
|
4.8
|
5.0
|
World inflation (%; av)
|
3.4
|
4.9
|
1.5
|
3.0
|
3.9
|
3.4
|
3.2
|
3.1
|
3.2
|
3.2
|
World trade growth (%)
|
7.1
|
2.8
|
-12.0
|
14.1
|
6.3
|
4.0
|
5.4
|
5.9
|
6.3
|
6.2
|
Commodity prices
|
|
|
|
|
|
|
|
|
|
|
Oil (US$/barrel; Brent)
|
72.7
|
97.7
|
61.9
|
79.6
|
110.9
|
109.5
|
103.4
|
104.5
|
107.3
|
110.0
|
Industrial raw materials (US$; % change)
|
11.3
|
-5.3
|
-25.7
|
45.4
|
21.4
|
-15.9
|
7.7
|
-0.2
|
1.3
|
1.8
|
Food, feedstuffs & beverages (US$; % change)
|
30.9
|
28.1
|
-20.3
|
10.7
|
30.1
|
-11.2
|
-3.2
|
-0.7
|
-1.9
|
2.7
|
Exchange rates (annual av)
|
|
|
|
|
|
|
|
|
|
|
¥:US$
|
117.8
|
103.4
|
93.6
|
87.8
|
79.8
|
80.1
|
83.6
|
86.8
|
89.0
|
92.2
|
US$:€
|
1.37
|
1.47
|
1.39
|
1.33
|
1.39
|
1.28
|
1.26
|
1.25
|
1.24
|
1.26
|
a PPP = purchasing
power parity
|
Source: Economist Intelligence Unit.
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The Economist Intelligence Unit
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