News: On Friday we published Global Macro Watch: Working To Resolve The Crisis, our view on the global recession risks for 2012
Recessionary outlook for 2012. Our base case remains downbeat for the global economy and we retain our global GDP growth forecast of 2.0% for 2012. Eurozone economic indicators already suggest that the region is lapsing into recession which requires more monetary accommodation by the ECB. In the US, improving activity and demand data in 3Q11 cannot be relied upon to be sustained given flat real income growth, frozen housing and labour markets and a tighter fiscal policy over the medium term. China looks to be achieving a soft landing and we continue to look for GDP growth slowing to 8.5% in 2012 and then 8.0% in 2013.
Sovereign debt risk will remain a key macro theme. There is unlikely to be much respite for policymakers to address fiscal consolidation over the medium term. Sovereign debt risk is not confined to the Eurozone and both US and Japan will be vulnerable to credit rating downgrades, especially in the US where there is a lack of bipartisan consensus in Washington to address budget issues ahead of the November 2012 presidential election.
EM economies are unlikely to decouple. EM economic growth is moderating but from a much higher base and fiscal constraints are less binding compared with DM economies. EM inflation rates are proving ‘sticky’ though, reflecting tight capacity constraints and, in some cases, high rates of credit creation. While EM interest rates will gradually decline in 2012, policymakers face a difficult challenge balancing the trade-off between growth and inflation.
Financial market outlook. Expectations for an early resolution to the Eurozone crisis might underpin a year-end rally for equities aided by central bank dollar funding support but longer-term debt solvency problems remain. We are also cautious about corporate earnings prospects for 2012; we see earnings expectations and global equities bottoming closer to mid-2012. Global recession risks will restrain the upside in DM bond yields aided by further quantitative easing though inflation is a longer-term risk. In FX, risk aversion and ‘better’ US economic data have underpinned USD while EUR is still vulnerable to the downside, especially as the ECB is expected to loosen monetary policy.