June EIU Global Economic Forecast June 2012
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The document provides an economic forecast summary for June 2012. It forecasts: - US real GDP growth of 2.2% in 2012, slowing thereafter. - Eurozone GDP to contract by 0.7% in 2012, with growth recovering slowly thereafter. Germany will fare best while Greece, Portugal, and Spain will fare worst. - EM economies will continue outperforming developed economies in 2012-2016, though Chinese growth will slow to 8.3% in 2012. It also discusses risks such as the European debt crisis, geopolitical tensions, and the impacts of fiscal policy changes.
June EIU Global Economic Forecast June 2012
- 1. Global forecasting service Economic forecast summary - June 2012 Master Template 1 www.gfs.eiu.com
- 2. We forecast US real GDP growth of 2.2% in 2012. Consumer spending started the year strongly, but will decelerate. Growth is forecast to average 2.3% in 2013-16. Serious headwinds remain, and our outlook is still cautious. Job creation remains uneven, and household indebtedness is weighing on spending . Housing market data has improved recently but a large overhang of unsold houses will drag on the property market. A drastic tightening of fiscal policy is in prospect in 2013 for the incoming administration. Congress is likely to moderate the impending tax rises.
- 3. Greek and French election results are challenging the euro area’s crisis response. A second election in Greece will strengthen the anti-austerity parties, putting pressure on the EU/IMF to soften their insistence on austerity. Sovereign funding costs will spike again. We expect the euro zone to survive, but anticipate much turmoil in 2012. The EU’s current bail-out funds are not large enough to accommodate Spain, let alone Italy. We expect euro zone GDP to contract by 0.7% in 2012. Germany will fare best; Greece, Portugal and Spain worst. GDP will recover only slowly thereafter.
- 4. The economy contracted by 0.7% in 2011, undermined by the negative impact of the March earthquake and tsunami as well as a strong yen that constrained export potential. Real GDP will grow by at least 1.5% in 2012, boosted by export growth and reconstruction activity. From 2013 growth will be constrained by high public indebtedness and deteriorating demographics. A recovery in Japan's automotive sector —after the disruption caused by the natural disasters and flooding later in the year in Thailand—will support both industrial output and exports in 2012.
- 5. Growth in 2012 will be constrained by sluggish OECD demand. EMs will still comfortably outperform their peers in the developed world in 2012-16. EM currencies will be sensitive to the “risk-on”, “risk-off” trade, rallying when investors are more tolerant of risk and falling back when investors flock to the US dollar. China is expected to grow by a somewhat weaker 8.3% in 2012, but still stronger than the government’s new medium-term target of 7.5%. Rebalancing the economy away from investment towards private spending will make for less commodity-intensive growth.
- 6. Oil consumption growth will be constrained in 2012 by the weak OECD economic outlook. It will average nearly 2% year on year in 2013-16, led by rising demand in the developing world. Geopolitical risks are weighing on the supply picture particularly the tensions between the West and Iran. Our forecast assumes a military outcome is avoided. Prices will average around US$113/b in 2012 as supply concerns offset the negative impact of weaker demand.
- 7. Consumption growth is expected to slow in 2012, constrained by weak EU and growth 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. Nominal prices will remain historically high in 2012-16, but prices will ease back in real terms.
- 8. Sluggish demand will be deflationary, but headline inflation will be elevated on the back of earlier oil price rises. The Fed has said it will keep interest rates very low until late 2014. A further round of quantitative easing appears unlikely if the US economy grows at a reasonable pace. We expect the ECB to hold its policy rate steady at 1% for two years. It may well need to reactivate its bond- buying and liquidity programmes to counter market tensions. Most emerging market central banks will keep interest rates broadly stable in 2012.
- 9. Europe’s debt crisis will keep the euro under pressure. We expect an average 2012 rate of US$1.31:€1, before a weakening in 2013-16. After a weak start to the year, the yen has strengthened in recent weeks. We have raised slightly our yen forecast given that we expect the currency to benefit from periods of risk aversion. EM currencies will be supported over the medium term by positive growth and interest rate differentials with OECD economies. China’s decision to allow the renminbi to move in a wider trading ban will increase volatility.
- 10. + Unprecedented policy response prevents break-up of euro zone 20 - The global economy falls into recession 15 - The euro zone breaks up 15 + Stronger than anticipated US growth boosts the global economy 12 - Tensions over currency manipulation lead to protectionism 12
- 11. - Social and political disorder undermine stability in China 10 - US dollar crashes 10 - Economic upheaval leads to widespread social and political unrest 9 - An attack on Iran results in an oil price shock 8 - Resumption of monetary stimulus leads to new asset bubbles 8
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Editor's Notes
- #3: The euro zone is forecast to underperform the US in 2009 as it suffers from a massive drop in external demand, the impact of the global financial crisis and the unwinding of domestic imbalances. The US recovery will be driven partly by aggressive fiscal stimulus which will make itself felt from the second half of 2009 and some restocking, after the extensive drawdown of inventories in the first half 2009.
- #4: The euro zone is forecast to underperform the US in 2009, largely reflecting the severe weakness of Germany, which, like Japan, remains highly exposed to the global trade cycle. The US recovery will be driven partly by aggressive fiscal stimulus, which will make itself felt from the second half of 2009.
- #5: The euro zone is forecast to underperform the US in 2009, largely reflecting the severe weakness of Germany, which, like Japan, remains highly exposed to the global trade cycle. The US recovery will be driven partly by aggressive fiscal stimulus, which will make itself felt from the second half of 2009.
- #7: Although we are forecasting steady growth in oil demand in 2011-13, ample supply and capacity will prevent significant price gains. While our forecast suggests markedly lower prices in 2009-13 than in 2008, they are still relatively high in both historical and real terms.
- #9: Policy rates in the largest industrial economies are forecast to remain at ultra-loose levels at least until the end of 2010. Concerns not to inflate fresh bubbles will persuade the Federal Reserve (the US central bank) to start to tighten policy from 2011.