The world economy faces exceptional – perhaps even unprecedented – uncertainty as it enters 2012. The rebound in output among developed countries has proven feeble, yet fiscal austerity is being launched, especially in the eurozone. The collective austerity of developed economies will likely bring on one of the most severe fiscal contractions in many years. These effects will be partly offset by developing countries, although growth is moderating as global financial conditions deteriorate.
World growth will slow in 2012 amid ongoing sovereign risk and austerity programmes
The world economy will grow by 3.8% in real terms in 2012, down from 3.9% in 2011 and 5.2% in 2010. The slowdown is a consequence of financial instability and fears of sovereign risk, which threaten to spread beyond a few European economies. In other developed countries (such as the USA) policy indecision exacerbates uncertainty. As a result, stimulus programmes launched in 2010-2011 are being replaced by austerity measures. The outlook is brighter for developing countries. External demand is weakening but in most emerging economies domestic demand should propel growth until the world economy becomes healthier. However, the outlook for developing countries is not risk-free. A few countries with especially open economies and dependence on demand in developed markets could struggle. Policy makers in larger developing countries generally have more flexibility than is available in the advanced world, meaning that the possibility of a soft landing is more likely than a hard one.
- Euromonitor expects developed countries to grow by 1.6% in 2012 in real terms. Such an outcome would be below historical trends and several economies are likely to experience sharp slowdowns, notably in the eurozone where sovereign risk is high. Collectively, advanced economies will slip into a synchronised slowdown as the loss in confidence spreads to consumers, bankers and investors;
- In emerging and developing economies, aggregate real growth will be 5.9% in 2012 compared with 6.3% in 2011. The slowdown can be partly attributed to the fact that many of these economies depend on exports to the developed world. Nevertheless, gains of income along with the rising middle class and growing trade between developing countries will ensure that most of these countries see solid gains in 2012. Developing countries will account for the bulk of world growth. A few emerging economies such as Belarus, Egypt, Iran, Pakistan, Venezuela and Vietnam could experience some overheating but the underlying reasons will be country-specific rather than from global change.
Real GDP Growth: 2005-2012
Source: Euromonitor International from International Monetary Fund (IMF), International Financial Statistics and World Economic Outlook/UN/national statistics
Note: Data for 2011 onwards are forecasts.
Fiscal consolidation will continue but the process will be complicated by the eurozone’s problems
- Most developed countries will proceed with fiscal consolidation in 2012. Policy makers have little room for error. The danger is that if fiscal consolidation should go too far, disposable incomes will fall and lead to a precipitous drop in consumer spending. Yet if medium-term plans for consolidation are not implemented, more financial instability could follow and households will raise their savings drastically. In either instance, policy errors would tip economies back into recession;
- Weighed down by the threat of additional downgrades from credit agencies, the eurozone’s debt crisis has taken a turn for the worst. In December 2011, Europe’s leaders again sought to reform the eurozone and agreed to more aggressive steps to enforce budget discipline, committed larger sums for bailouts, accelerated the timetable to deploy the European Stability Mechanism, and other measures. Yet one fundamental flaw is that the UK’s veto of treaty change forced leaders to construct an awkward “intergovernmental” system which may not be able to make use of the European Commission, the European Court of Justice or the European Central Bank (ECB). Another problem is that each country must agree on new rules, which will have to be ratified by national parliaments. In the meantime, the eurozone will be subjected to more financial instability, which could send Europe back into recession in 2012 and weigh further on global economic prospects.
Commodity prices should be relatively stable or ease slightly in 2012
- China’s demand for commodities means that its economic prospects are especially important for commodity markets. China’s growth of commodity imports is expected to decelerate in 2012 as Beijing’s leaders focus on inflation and problems in property markets. Growth in developed countries will be too slow to create upward pressure on commodity prices. In general, the pressure on global demand-supply balances for commodities will ease, meaning that prices will be stable or fall slightly in 2012;
- In oil markets, developed economies are the largest consumers but it is emerging and developing economies that account for almost all the growth in demand. Supply hinges mainly on Saudi Arabia that generally has ample spare capacity. Oil demand, however, should moderate as economic momentum in the developed world decelerates. More broadly, oil markets expect that supply at current prices will keep pace with global demand which is rising at 1-1.5% per year. Thus, prices should remain high (around US$100 per barrel) but broadly constant in real terms.
Unemployment continues to be a problem particularly for developed countries
- Employment lags behind the recovery of output in any recession, but recessions that stem from financial crashes require more time to recover. According to the ILO, world employment may not return to its pre-crisis level for another five years and globally, more than 200 million people are out of work;
- Developing countries can generate new jobs by channeling investment into agriculture and rural areas but the options for advanced economies are more problematic without new stimuli. The only exception may be European countries that are being forced to reform their labour markets in response to external pressures. Among the larger economies in Eastern Europe, Bulgaria, Croatia, Estonia, Hungary and Slovakia will see double-digit rates of unemployment as exporters falter and they struggle to implement structural changes. Repercussions from the “Arab Spring” will keep the number of jobless high in Egypt and Tunisia. Other countries such as Jordan, Kenya, Nigeria and South Africa face similar consequences owing to weak external demand or structural deficiencies in labour markets. Spain will continue to have the highest unemployment rate in the eurozone in 2012 at a forecast 20.0% of the economically active population, owing to property and construction sectors that went bust and structural problems in labour markets.
Growth of world trade will moderate while protectionist pressures mount
- According to the OECD, the volume of world trade is expected to grow by 4.8% in 2012 compared with 6.7% in 2011, which is modest in comparison with historical trends. The primary danger for the world trading system is that slower growth in advanced countries and the complications of the eurozone crisis will spawn a fresh wave of protectionism;
- According to the World Trade Organisation, only 17% of all supposedly short-term protectionist measures introduced during the Great Recession in 2008-2009 have been reversed. Exporters will face a new wave of protectionism that could cut the growth of world trade more than anticipated. Several countries are imposing new export restrictions or trying to force foreign investors to share intellectual property. Others insist on “local content” rules for foreign investors or demand technology transfer agreements.