Global Forecasting Service
Global outlook summary (Forecast closing date: September 12th 2011)
World economy A sharp escalation in the euro zone debt crisis is sending shock waves through the global economy, depressing sentiment and raising the risk of another recession. With markets volatile, financial and economic uncertainty is at its highest level since the grim days of late 2008. The Economist Intelligence Unit’s global growth forecast remains little changed since last month, when we substantially cut our projections. We have, however, lowered our forecast for euro zone growth a bit further. We expect the world economy to expand by 3.6% on a purchasing-power-parity basis this year and by 3.4% in 2012. This compares with almost 5% last year, when concerted stimulus boosted growth. The global economy was always likely to slow once this stimulus wore off, especially as exceptionally low interest rates in the US and the need for fiscal austerity in many countries limit the scope for further policy action. However, a series of shocks and policy blunders have conspired to make a difficult situation worse, resulting in an erosion of confidence that has been deeper and more damaging than expected. These disruptions have included the crisis in the euro zone, political wrangling over the debt ceiling in the US, war and political unrest in the Middle East and North Africa, and natural disaster in Japan. The surge in global oil prices earlier this year was also a serious shock to many economies. All these factors have contributed to either fundamental or sentiment-driven falls in supply and demand. The debt crisis in the euro zone is threatening the global economy
2012: AT A GLANCE World GDP growth, at PPP 3.4% World inflation (av) 2.9% Oil/barrel (av, Brent) US$94.5 US$:€ (av) 1.36 © The Economist Intelligence Unit Limited 2011
Of the above issues, we consider the euro zone debt crisis to be, by far, the most serious threat to the global economy. The risk of huge financial losses for holders of, say, Greek or Italian government bonds is alarming markets and causing large declines in equity prices. The uncertainty over which banks are most exposed is causing financial institutions to hoard cash, leading to rising pressures in funding markets. The financial system is transmitting these concerns to the rest of the world, especially the US. Most worrying, a lack of political leadership in Europe has reduced prospects for a quick resolution of the crisis. What do these troubles mean for our forecast? For now, we still believe that the global economy, and the US and the euro zone in particular, will avoid an outright contraction in GDP. But economies are on a knife’s edge, and a further deterioration of the euro zone’s debt prospects, or another round of politically driven fiscal warfare in the US, could drive consumers and businesses to the sidelines for an extended period, pushing either or both economies into recession. As we mentioned in last month’s forecast, we also believe that the risk of a break-up of the euro zone is now very high. gfs.eiu.com
Global Forecasting Service October 2011