Research Blog
Quarterly Economic Outlook (Q1 2012)
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Grant Lewis, Economic Research
Daiwa Capital Markets Europe Limited
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9 January 2012
The global economy entered 2012 with the outlook as uncertain as at any time since 2008. Growth globally softened through the second half of 2011 and will fail to regain momentum over the near term. While the US economy was an exception in seeing stronger growth in the final quarter of the year, it failed once again to reach escape velocity as the hangover from the financial crisis remained hard to shake off. But it is developments in the euro area debt crisis, of course, that dominated economic and market sentiment in 2011 and will continue to do so through 2012. There are myriad paths the crisis could take from here, but we have assumed that a “muddling through” scenario is the most likely outcome – certainly that is the revealed preference of euro area policymakers who have repeatedly failed to demonstrate an appetite for delivering a lasting solution to the crisis.
“Muddling through”, of course, implies continued high uncertainty, onerous funding costs for many countries, continued banking sector stress and crushing austerity measures across much of the euro area. Given this backdrop, recession is unavoidable, and we expect the euro area economy to shrink in 2012. The UK also looks to have already returned to recession. The US, on the other hand, should avoid a double-dip, but growth looks set to remain fairly anaemic. In Asia, having slowed through the second half of 2011, the Chinese economy looks set to continue to slow at the start of 2012. The Japanese economy, meanwhile, looks likely to see insipid growth at the start of 2012, although the recovery should build through the year as post-quake reconstruction efforts gather pace. Growth in Korea and India, meanwhile, will also continue to slow, while in emerging Europe all countries will feel the full force of the crisis in the euro area. Those with stronger fundamentals and policy frameworks (e.g. Poland) are far better equipped to cope than those, such as Hungary, where policymaking has taken a turn for the worse, risking a new crisis.
With growth continuing to weaken, disinflationary forces will intensify across most of the globe. Against this backdrop, a further loosening of monetary policy can be expected from most of the major central banks. With the US economy likely to improve as the year progresses, however, we do not expect the Federal Reserve to adopt new initiatives to support the economy although we look for it to keep its highly accommodative stance in place for the entire year. In the euro area, however, we expect the ECB to cut its refi rate in Q112 below the 1% level that up to now has acted as the lower bound. But the ECB will not markedly increase its purchases of sovereign bonds. Meanwhile, having already reduced the reserve requirement ratio (RRR) in Q411, we expect a further 200bp reduction in the RRR over the course of H112 from the PBOC. We do not expect a reduction in Chinese interest rates, however. In Japan, weak activity coupled with continued mild deflation and concerns about the impact of the strong yen will prompt the BoJ to increase further its asset purchase programme. Further monetary easing looks a certainty in the UK, where we expect the BoE to implement a further £150bn of asset purchases, taking the total to £425bn. Beyond the major economies, monetary policy easing looks on the cards in several countries, including Brazil, India, and Poland, where the inflation outlook and financial conditions allow it. However, by and large, central banks are likely to remain in wait-and-see mode as events in the euro area unfold.
Our latest GDP, inflation and monetary policy forecasts for 2012 and 2013 can be seen in the tables below. The full forecast document is available here.
GDP
*%, Y/Y. **%, Q/Q annualised for the US. ***Indian full-year figures provided for fiscal not calendar year. Source: Daiwa Capital Markets
Inflation
*Core CPI (excl fresh food). **WPI. Source: Daiwa Capital Markets
Monetary policy*
*Main policy rate or asset purchases target as specified. **Assets purchased under asset purchase programme introduced in October 2010. ***Turkish interbank overnight rate. Source: Daiwa Capital Markets
Daiwa Capital Markets’ regional economic teams
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