September 2011 EIU Global Economic Forecast

Global economic forecast September 13th 2011

The economy grew more slowly than thought in the first half of 2011, in part owing to high gasoline prices. We are forecasting US GDP growth of 1.6% this year and 2% in 2012. Fiscal tightening will subtract from growth in 2012-13 but Mr Obama’s stimulus and jobs package will soften the blow, provided it is passed by Congress. The Fed will keep interest rates very low through the first half of 2013. But deleveraging will constrain spending. A large overhang of houses will prevent a recovery of the property market, with an adverse impact on households’ balance-sheets.

The eurozone economy slowed sharply in the second quarter. Even Germany is now barely growing. Fiscal austerity and high borrowing costs will hold back the periphery.The eurozone crisis has escalated, engulfing the large economies of Italy and Spain. The ECB has reluctantly started buying Italian and Spanish bonds to stabilise yields. Greece’s failure to meet conditionality set by the EU/IMF has jeopardised a €8bn disbursement due in September, raising the prospect of imminent default and even exit from the euro zone.

The March 11th earthquake and tsunami have had a severe impact on power supplies and supply chains, even if second quarter GDP figures were much better than feared.

Manufacturing is already experiencing a V-shaped recovery and the economy will return to growth in the second half. We forecast GDP growth of -0.5% in 2011, followed by 2.3% in 2012.

The yen continues to appreciate, fulfilling its role as a traditional safe haven in uncertain times.

The Brazilian central bank made a surprise cut in interest rates in light of the worsening global outlook. With inflationary pressures now abating, other emerging markets may cut rates or at least postpone monetary tightening. Emerging markets lost momentum in the second quarter but should still post decent growth in the second half of 2011. For 2012 we have trimmed our growth forecasts to reflect sluggish demand in the West. We still expect emerging markets to outperform their developed peers.

Oil consumption will continue to grow in 2011-12, led by the developing world. Consumption is expected to be flat or falling in the developed world

The prospect of a resumption of Libyan output in the next 1-2 years has improved the supply outlook. Geopolitical risk remains high, however.

Slowing economic growth will lead to lower prices from the second half of 2011

Demand is expected to weaken owing to a slowdown in the developed world and somewhat slower growth in the developing world

However, rising emerging market incomes and urbanisation will underpin medium-term demand growth

Years of underinvestment, particularly in agriculture, will support prices

Gold prices will come under pressure by 2013 as interest rates start to rise and investors reduce their holdings

Faced with persistently high unemployment and the risk of a double-dip recession, the Federal Reserve will keep its policy rate at exceptionally low levels until mid-2013. The ECB raised its policy rate by 25 basis points to 1.50% in July. In light of the escalation of the eurozone debt crisis, we expect further tightening to be postponed. Rate cuts are possible if the crisis continues to worsen. Japanese policy rates will be held at emergency levels until at least 2013.

The support the euro has been receiving from a positive interest differential in relation to the dollar appears to be fading as debt stresses in the eurozone periphery escalate.

The yen will be supported by Japanese institutional investors’ home bias but a declining domestic savings rate will make it vulnerable in the medium term.

Emerging market currencies are vulnerable to risk aversion but will continue to be supported by wide interest rate and growth differentials with OECD economies.

- The global economy falls into recession

- The euro zone breaks up

- Disorderly defaults by developed world-sovereigns rock markets

- New asset bubbles burst, creating renewed financial turbulence

- The Chinese economy crashes

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- Tensions over currency manipulation lead to protectionism

- Oil prices remain at extremely high levels

- The US dollar crashes

- Economic upheaval leads to widespread social and political unrest

+ Oil prices slump

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