2012: The Global Economy in Flux

As we reach the halfway point of the year it’s a good time to take stock. So far in 2012 we have continued to see a mixed economic picture with risks mainly on the downside. In fact as the year progresses news appears to be getting bleaker and risks becoming ever more heightened. As we predicted when the financial crisis hit in 2008, the recovery, in common with most recoveries following financial crises, is proving to be long and arduous.

In the first six months of the year the world has been mired in another period of great economic uncertainty. The eurozone crisis is casting a shadow over economic growth. We are currently estimating global real GDP growth to fall to 3.2% in 2012, down from 3.8% in 2011;

So far 23 of the EU-27 countries have released GDP estimates for the first quarter of this year. Of these 23, eight are in recession (Czech Republic, Spain, Italy, Cyprus, Netherlands, Portugal, Romania, and the UK).

Advanced economies are on the whole expected to see stronger growth in the second half of this year, than has been seen so far. The USA and Japan are growing at a faster pace than Europe:

• Both the EU and the eurozone as a whole managed to escape technical recession in the first quarter of 2012, with growth remaining flat – largely due to the strong performance of Germany, the region’s biggest economy. Indeed, the figures mask a sharp division between periphery eurozone countries and core countries. Germany experienced seasonally-adjusted growth of 0.5% over the previous quarter, whereas Italy, Portugal, Spain and Greece all saw their economies shrink;

• Japan surprised on the upside in the 1^st quarter of this year with seasonally-adjusted growth of 1.0% over the previous quarter.  With the trade deficit widening and public finances a concern – Japan has the world’s largest government debt projected to be 243% of GDP in 2012 – Euromonitor is expecting real GDP growth of 1.0% for 2012 as a whole as the boost from reconstruction following the tsunami and earthquake falls away;

• The USA, which grew by a seasonally-adjusted 0.5% in the first quarter of 2012 over the previous quarter, is in need of a credible plan to reduce its deficit. The planned fiscal tightening in 2013, which includes tax increases and spending cuts, is likely to have a detrimental impact on growth next year.

Real GDP Growth in Selected Advanced Economies: Q1 2011 – Q1 2012 % growth quarter-on-quarter

Source: Euromonitor International from national statistics/Eurostat

Note: Data are seasonally adjusted

Emerging economies continue to lead global economic growth. In 2012 growth is expected to be strong, but weaker than in recent years and as well as the impact of the eurozone crisis, many policy challenges remain:

• The first quarter of 2012 saw China’s economy grow by a seasonally-adjusted 1.8% in real terms over the previous quarter – the slowest rate of growth since the second quarter of 2009. In April, industrial production experienced a sharp slowdown to 9.3% (non-seasonally adjusted) over the same month of the previous year – the slowest rate of growth since May 2009. China is expected to move to stimulus including boosting infrastructure investment, tax cuts and programmes to boost private consumption;

• Brazil is currently growing at a relatively slow pace, with seasonally-adjusted first quarter real GDP growth of 0.2% over the previous quarter. The economy is suffering from a weak and volatile Real which although helps exporters, harms companies who have borrowed in US$. Consumer demand remains strong however bolstered by low unemployment, which is has averaged 5.9% in the first four months of 2012;

• In India, inflation remains a concern with the wholesale index price accelerating in April to 7.2% (seasonally-adjusted) on a year earlier reversing previous falls. Industrial output and exports have also registered falls and there are increasing fears about a slowdown in consumer demand – as well as the impact of the eurozone crisis. These trends combined to produce seasonally-adjusted real GDP growth of 1.3% in the first quarter of 2012 over the previous quarter.

Real GDP Growth in Selected Emerging Economies: Q1 2011 – Q1 2012 % growth quarter-on-quarter

Source: Euromonitor International from national statistics/OECD

Note: Data are seasonally adjusted

The key downside risk to the global economy is the continuing sovereign debt crisis in the eurozone and the fears of contagion of negative effects from a possible Greek exit from the currency union and even a collapse of the union itself. With the eurozone responsible for one quarter of world trade in 2011 then further crises in the currency union will have a global reach.

In the eurozone, voters in Greece and France have rejected austerity and the debate between austerity and stimulus is entering a new phase. The IMF has advised the UK to consider a plan B aimed at less austerity and more stimulus even advising that interest rates could be cut below their current (historically low) 0.5%.

In the second half of 2012 we will see a move towards more efforts to stimulate growth rather than austerity, with China also expected to increase stimulus in response to its Q1 slowdown. All eyes remain on the eurozone and also on the Greek election scheduled for June 17^th 2012.