Friday, September 21, 2012

Global Growth Outlook

This post is part of an Investment Insights published earlier this week.  For a PDF of the full note, including commentary on a number of the major economies, please visit

The global economy is currently in the grip of a synchronised slowdown.  In the developed world Europe and the UK are in recession, while growth in America has shifted down a gear.  While we have seen previous bouts of weakness in some of the major economies at various stages post the Global Financial Crisis (GFC), this time it has been accompanied by slowing growth in the key emerging economies of China, India and Brazil.

We put much of the blame for the current slowdown on the ongoing euro zone debt crisis.  The impact on the rest of the world has been twofold:  the direct impact through trade, and the less direct but no less important impact on reduced business confidence levels which is serving to delay investment and hiring decisions.

Countries also have their own unique circumstances.  In America the impending fiscal cliff is serving to delay investment and hiring decisions.  QE3 will make a difference to real economic activity only at the margin.  In the United Kingdom, while exports have suffered greatly from the recession in Europe, the government’s experiment with expansionary austerity is failing.

We said post GFC that the key emerging economies didn’t suffer the same structural problems as the developed world (ie high debt levels).   However, the current slowdown is exposing their structural issues.  China is moving to a lower structural level of growth which means sustained periods of double-digit growth are now in the past.  India is struggling with necessary structural economic reform.  The good news is emerging markets have greater flexibility on both monetary and fiscal policy although, as is the case in the developed world, monetary policy can’t fix everything.

The June quarter of 2012 marked the weakest period for global growth since the recovery from the GFC.  Previously we had expected a modest recovery from the second half of the year, however partial activity data suggests the September quarter will be weaker again.  From there growth in activity is likely to stabilise into the end of the year, helped largely by reduced financial tension in Europe on the back of the European Central Bank’s Outright Monetary Transactions (OMT) plan.  The resultant reduction (though not elimination) of downside tail-risks of a euro zone breakup will support improved levels of business confidence.   The modest recovery in growth is now likely to be a 2013 phenomenon.

We now expect annual average global GDP growth of 3.0% in the 2012 calendar year, down from 3.3% previously.  That’s a mix of 1.2% growth in developed markets and 4.9% in emerging markets (at purchasing power parity weights).  In 2013 we expect global growth of 3.4% (1.4% developed markets and 5.4% emerging markets).  The recovery in 2013 assumes a modest recovery in Europe, further policy easing in China and a smaller fiscal contraction in the United States than current policy settings would suggest.