Global outlook
| USA - Little bang for the buck? Read more » |
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| UK - Recovery, but only just. Read more » |
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| Eurozone - Recession over, hopefully. Read more » |
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| Overview of the BRIC countries: Brazil - Back in the swing of it. Read more » |
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| Russia - Slow, painful recovery. Read more » |
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| India - So far, so good. Read more » |
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| China - Too hot, too soon? Read more » |
USA - Little bang for the buck?
‘The US economy emerged from recession in 2009q3. Consumers came roaring back with spending on durables rising at a pace last seen in 2001. Government spending, inventory rebuilding and a long-awaited recovery in residential investment also played a role.’
But growth of 2.2% on a seasonally adjusted annualised basis seems weak given the massive amounts of fiscal stimulus pumped into the economy during the quarter. Once withdrawn it will be interesting to see if the private sector recovery has legs of its own.’
The recovery finally arrives
A year and a half after entering recession, the US economy began expanding again, posting growth of 2.2% on a seasonally adjusted annualised basis in 2009q3. All broad components of domestic demand contributed to growth in the quarter, although fiscal measures were largely the reason that consumers posted their strongest quarter since 2007q1. Indeed, spending on consumer durables posted their best quarter since 2001q4 on the back of government car-buying incentive schemes.
Survey indicators show that activity in the US economy continued accelerating in 2009q4. Manufacturing PMI has been expanding steadily since August, with firms not only seeing orders and production rising, but starting to add to headcount as well. Services have had more of a fitful recovery since September, with firms still shedding jobs.
Growth in the second half of 2009 sets the sage for a stronger 2010 than initially forecast, with growth now expected to reach 2.4% for the year. Government will again lead the way as the bulk of the nearly $900bn fiscal stimulus package is spent in 2010. This will help to make up for another few weak quarters for business investment.
It seems unlikely that the 2.8% annualised rate of consumer spending growth in 2009q3 will be matched in the near future. Prices have begun rising again on an annual comparison, the service sector continues to shed jobs and households seem to be changing their behaviour, paying down more than US$100bn in revolving credit in 2009. This deleveraging will put a lid on growth, with spending to expand by just 1.1% in 2010 and 2.1% in 2011.
Key risks
Significant downside risks remain. Unemployment is still rising. Surveys show that lending conditions are set to remain tight well into 2010. While house prices nationally have been rising for the last six months, starts hit a six-month low in November, raising fears of a ‘double-dip’ downturn in the market. With consumers continuing to pay down debt, policymakers will have to be extremely careful as they begin to withdraw monetary and fiscal stimulus.
Matthew Sherwood
Senior Global Economic Adviser
UK - Recovery, but only just.
‘The UK economy limped out of its 18-month long recession in 2009q4, posting growth of just 0.1%. This was in line with our expectations and reinforces our view that the recovery in its initial stages will be patchy and gradual, constrained by a still uncertain global backdrop and public and private sector debt problems’.
Threats persist to even this tentative upturn, and the risk of a relapse in one or two quarters cannot be ruled out’.
Growth resumes, but how strong will recovery be?
The UK economy grew by 0.1% in the final quarter of 2009, ending its 18-month recession.
This outcome was in line with our expectations and reinforces our view that the recovery in its initial stages will be patchy and gradual, constrained by a still uncertain global backdrop and public and private sector debt problems’.
Our baseline scenario is for fragile growth in GDP during the early months of 2010, followed by a gradual pick up in activity in the second half of the year as investment recovers and household spending responds to stronger income growth (though the impact will be partly offset by higher interest rates).
Employment conditions are stabilising sooner than expected. According to both the claimant count and the broader LFS measure, the unemployment rate remained unchanged at 5% and 7.8% respectively in the three months to November.
Consumer price inflation (CPI) rose by 2.9% in December, up from 1.9% in November. The jump in the annual rate was driven by unfavourable base effects related to the exceptional drop in prices during December 2008.
Key risks
The risks surrounding our baseline view are evenly balanced. The main upside risk is the possibility that the recovery will gain strength sooner than expected from one or both of the following: an earlier-than-expected revival in consumer spending; and a boost to exports from strengthening eurozone activity and the weak pound.
There are two key downside risks. Firstly, the recent upturn in key indicators fades abruptly, leading to a relapse. Secondly pressure on public finances leads to too early a withdrawal of government support measures. Medium-term prospects are constrained by weak household finances, less support from employment income and housing wealth than in the past decade, the need to restore viability to government finances and a troubled financial sector.
Sunita Bali & Peter Gutmann
Senior Economist & Managing Consultant
Eurozone - Recession over, hopefully
‘The eurozone economy emerged from recession in 2009q3. While some weakness will persist into 2010, momentum is building gradually as confidence measures rebound.’
But recovery will largely be one of two tales. Some export-led economies will lead the way in 2010-11 while the laggards will see little or no growth for at least another year.’
Eurozone exits recession
In 2009q3 the eurozone economy posted growth for the first time since 2008q1. During the intervening quarters output contracted by over 5%. Exports plummeted, by nearly a fifth. That all changed in 2009q3, with real GDP expanding by 0.4%. This made for a 4% annual decline.
The rebound occurred despite household spending contracting by 0.2%. Government stimulus played a major role in boosting growth, directly through spending, and indirectly through various car-buying and worker-retention schemes. The former, along with the global inventory cycle, saw the strongest performance by exports in 11 quarters.
France and Germany continued to pull further out of recession. Germany was the primary beneficiary of the strong upturn in global demand, which also helped to lift investment as well. The timing could not have been better, as the end of the car scrappage scheme saw German consumer spending retrench..
Given further signs of recovery, forecasts for 2010 and 2011 have been upgraded. But we remain cautious. The unique nature of this global downturn – with its roots in highly indebted consumer and financial sectors in some of the world’s larger economies – precludes a rapid recovery. We could even see the odd quarter of contraction in the year ahead, particularly as scrappage schemes and inventory rebuilding come to an end.
Key risks
Order books still remain close to all-time lows. With employers still shedding jobs – unemployment rate reached 9.7% in September – it does beg the question of just how sustainable the recovery will be after the inventory adjustment and scrappage schemes run their course. While the euro would seem ripe for a sell-off against the dollar, it increasingly looks like euro strength is more of a permanent feature. This will especially hurt the ‘laggard’ members, whose exporters are getting killed by the strong euro.
Matthew Sherwood
Senior Global Economic Adviser
Overview of the Bric countries
Brazil - Back in the swing of it
‘After a brief and light recession in early 2009, Brazil’s economy returned to positive economic growth by the third quarter and will attain trend economic growth by late 2010.’
The real has been a favourite among investors since the start of 2009. However, with Brazil’s high national debt the real remains at risk to investor mood swings, as the Dubai contagion scare in late 2009 demonstrated.’
Return to trend growth by late 2010
After a brief and (by global standards) shallow recession in early 2009, Brazil’s economy returned to positive economic growth by the third quarter and will attain trend economic growth by late 2010. While the recovery has been led by commodity export sales and consumer spending, business and state investment will remain depressed until 2011.
With presidential, legislative and gubernatorial elections in October 2010, the government has extended the fiscal stimulus programme into 2010, focussing on current spending items (state wages and pensions). Opinion polls have the PT (workers) and PSDB (social democrats) parties at similar levels of popularity.
Wary of domestic demand conditions, the central bank has restated its determination to adhere to its inflation target (4.5%, +/-2%). Its policy Selic rate has been at the its lowest ever (8.75%) since mid-2009 and is likely to remain there for most of 2010 as inflation expectations have fallen and the real’s appreciation over 2009 has reduced import prices.
Brazil’s consumer markets will continue to develop quickly as the low- and middle-income groups, the main beneficiaries of the economic expansion under Luiz Inacio Lula da Silva’s eight year presidency, resume their spending habits. Tax cuts have supported the durable consumer product sectors during and after the recession, but non-durable sectors will gain more of consumer spend into the medium term.
Population growth and rising participation rates will mean that unemployment will remain stubbornly high, at around 8% of the working population into the medium term, despite the expected net job creation, notably in the manufacturing sector. After the 2010 budget’s 9.7% increase in the influential Minimum Wage, earnings inflation is expected to wind down quickly toward 5%.
Key risks
With consumer markets reviving and the government engaging in deficit spending, the domestic economy could over-heat in 2010, pushing up inflation and forcing the central bank into interest rate increases ahead of the October elections. The real has been a favourite among investors since the start of 2009. However, with Brazil’s high national debt the real remains at risk to investor mood swings, as the Dubai contagion scare in late 2009 demonstrated. Without substantial investment, Brazil’s under-developed communications and transport infrastructure could undermine its credentials as a manufacturing site in the region over the longer term.
Peter Gutmann
Managing Consultant
Russia - Slow, painful recovery
‘With the Reserve Fund almost exhausted, the government has signalled that fiscal stimulus will end in early 2010.’
The economy will remain precariously dependent on the oil price. Though unlikely, a sustained oil price drop towards $50/barrel would tip the economy back into recession in 2010.’
Recovery left to businesses as the state steps aside
Russia’s deep recession in 2009 will be followed by a painfully slow recovery over 2010 and 2011. Credit conditions will remain tough and the economy’s trajectory will depend heavily on the Urals crude oil price staying well above $50/barrel.
With the Reserve Fund almost exhausted, the government has signalled that fiscal stimulus will end in early 2010. Nonetheless, a lower tax yield will mean fiscal deficits until 2012 and possibly beyond, and the state is likely to enter the eurobond market for additional finance.
The Central Bank of Russia (CBR) will continue to reduce its policy rate toward 7% in 2011 to support domestic demand and constrain the rouble’s (oil price-led) appreciation. Formal inflation targeting is expected by 2011, allowing a free float for the rouble.
Consumer markets will trail the economy’s recovery. Rising unemployment, falling real disposable incomes and soft house prices will encourage consumers to continue to repay debt over 2010 and 2011. Haunted by the 1998 financial crisis, Russia’s new middle class, who have gained most from the energy-exporting prosperity, will be affected more than most by the severity of the economic downturn.
Excess capacity in the private sector and public sector job cuts over the next two years should keep the jobless total high in the short term. Much lower wage inflation will be a key factor in the lower price inflation into the medium term.
Key risks
The economy will remain precariously dependent on the oil price. Though unlikely, a sustained oil price drop towards $50/b would tip the economy back into recession in 2010, leading to further cut backs in business investment and state spending. In his annual address to parliament the president, Dmitry Medvedev stressed the need for modernisation in the economy, generally taken to mean more intervention in industry and trade protectionism. This would potentially deter investors and bond markets and counteract the budding market interest in emerging economies.
Matthew Sherwood
Senior Global Economic Adviser
India - So far, so good
‘The Reserve Bank has started raising rates as inflation remains stubbornly high. Government action has helped to put a floor under the economy. GDP is now on an upward trend.’
With the worst of the global recession behind it, the Indian economy will see growth accelerate slowly before picking up more strongly in 2010/11. Downside risks loom as prices rise sharply owing to the fiscal stimulus and supply constrains.’
Growth rates soften – but economy remains robust
The last two quarters of FY2009 saw a significant slowdown due to the global backdrop. After three years of +9% growth, annual expansion slowed noticeably to just 6.1% in year 2008/09. The economy has since embarked on an upward trend, recording 6.7% year-on-year growth in 2009q3 (FY2009q2).
As the deepest point of the world recession falls between the two fiscal years, real GDP growth is projected to accelerate modestly, from 6.1% in fiscal year 2008/09 to 6. 8% in 2009/10. Except for consumer spending all other components of domestic demand will slow significantly in 2009/10.
India has suffered its worst drought since 1972, with rainfall 23% below average at the end of the four-month monsoon season. As the economy recovers, the Reserve Bank of India has started tightening monetary policy as the only way to keep a lid on prices.
Consumer demand almost came to standstill in 2008/09, falling to annual growth of just 1.6% in CY2009q2. But fiscal measures and strong asset markets have been a boon to the household sector, with consumer spending rebounding strongly in CY2009q3. Household consumption growth in excess of 6% per annum is projected over the medium term.
Key risks
Risks to the forecast are somewhat balanced between downside and upside. The return of strong growth in domestic demand, coupled with supply-side bottlenecks caused by the drought, are resulting in mounting inflationary pressures. Reserve bank action will be crucial. On the upside, asset markets have been rallying, which has major implications for high-spending, wealthier households. If more than short-lived, the consumer sector could be poised to rally strongly in 2009/10.
Peter Gutmann
Managing Consultant
China - Too hot, too soon?
‘China’s economy continues to recover strongly after teetering on the brink of recession a year ago. A raft of government stimulus and government-directed bank lending have done the trick, as China’s authorities firmly buy into the idea that “we’re all Keynesians now.”
While China has done the world a favour, helping to lift the global economy out of recession, there are signs that parts of the domestic economy are overheating again. Policy will be reined in, but is it too little, too late?’
Overheating?
China’s economy is storming ahead, benefitting from fiscal stimulus and a massive rise in bank lending in 2009. While net exports and inventories were a considerable drag on growth in 2009, household and government spending and investment remained comparatively strong. Besides government investment plans, state-controlled banks have pumped considerable sums of money into the business and consumer sectors. As a result, annual real GDP growth surpassed 9% in 2009q3.
Despite massive job losses in export-led industries in 2008-09, retail sales have continued to boom. Even when deflated by price rises, sales in real terms continue to grow at annual rate of 16-17%. This is raising hopes that the rebalancing of China’s economy away from over-dependency on exports may have begun in earnest.
The consumer sector should eventually take over from investment as the driver of growth. But such a rebalancing is likely to be gradual, particularly given investment’s substantial share of output and its focus of government stimulus.
In the longer term, investment is expected to slow gradually. Though government-sponsored investment in lagging regions will provide an important source of support, spending on infrastructure will decelerate. The build-up of capacity in many industrial sectors will constrain capital formation.
Demographics also will be a negative factor influencing growth. The government’s one-child policy means that the working-age population will begin shrinking some time toward the middle of the next decade.
Key risks
While government stimulus is playing a major role in China’s growth story, the danger is that money is being thrown mainly at state-owned companies and infrastructure projects that will do little to raise the economy’s long-term efficiency while proving inflationary in the short to medium term. Authorities are increasingly on watch for asset bubbles, and have started to rein in policy, by increasing banks’ reserve requirements and lowering bank lending targets. But the government’s ability to manage the recovery will be firmly tested, especially as demand in the rest of the world remains so weak. Fearful of fomenting another downturn, the authorities may prove too cautious, storing up worse problems for further down the road with implications for the beleaguered world economy.
Matthew Sherwood
Senior Global Economic Adviser