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© The Economist Intelligence Unit Limited 2010 gfs.eiu.com Global Forecasting Service August 2010
Global Forecasting Service
Global outlook summary(Forecast closing date: July 9th 2010)
World eeconomyThe world economy has shaken off recession, but growth will soften in the next
six months as the effects of the stimulus measures introduced in many large
economies fade. Leading indicators for the developed world already suggest a
mild slowdown is on the way, and the Economist Intelligence Unit’s latest glob-
al forecast reflects this. We think world GDP (at purchasing power parity) will
grow by 4.2% this year, but by just 3.6% in 2011. However, although economic
conditions will be tougher next year, we do not expect any large developed
countries to slip back into full-blown recession.
Recent data offer a mixed picture. On the positive side, private demand has
improved. More businesses are restocking. Many companies are in far more
robust financial health, having shed jobs and cut salaries during the worst of the
crisis. Consumers have also become more confident and are spending again.
More negatively, recent US jobs figures have been weak, while a massive stabil-
isation package has failed thus far to restore confidence in euro zone debt mar-
kets. There are also signs of slowing growth in China.
The biggest concern is how strongly the global economy can keep growing once
temporary factors such as inventory adjustments and fiscal stimulus, which
kick-started the initial recovery, wear off. It is just possible that the private sec-
tor now has enough momentum of its own, but the odds are against it. Balance
sheets have improved, but many households are still overstretched and will
have little spare cash in the next few years. This would be less of a problem if
the public sector were in better shape, but as the sovereign-debt crisis in the euro
zone has illustrated, the finances of many governments in the developed world
are extremely weak. Austerity programmes threaten to crimp economic growth.
Even governments with healthier fiscal positions will soon have to withdraw
stimulus—if they are not already doing so.
Hopes that emerging markets will be the saviours of the world economy also
look misplaced. Many developing countries (with the exception of much of cen-
tral and eastern Europe) have indeed recovered exceptionally well. But this
growth has depended on a combination of easy monetary and fiscal policy and
exports to the rich world. Most emerging countries will not be able to grow so
quickly without policy support, especially as an increasing number of such
countries are also having to think about raising interest rates to ward off infla-
tion. Nor are exports likely to remain as buoyant if growth weakens in key mar-
kets like the US. In short the idea that emerging markets have “decoupled” from
demand in the developed world, or that they can drive global economic growth
in the absence of such demand, doesn’t really wash.
The global economy will struggle togrow at the same pace once policystimulus is withdrawn
2010: AT A GLANCE
World GDP growth, at PPP 4.2%World inflation (av) 2.9%Oil/barrel (av, Brent) US$80US$:€ (av) 1.26
2 Global outlook summary
Global Forecasting Service August 2010 gfs.eiu.com © The Economist Intelligence Unit Limited 2010
Developed wworldThe US economy epitomises many of these issues. Growth is being driven by fis-
cal and monetary stimulus and by changes in the inventories held by manufactur-
ers and other companies. But these effects will weaken in the second half of 2010.
We think the government may pass small additional stimulus measures, but there
is no political appetite for stronger action. This will leave the economy to grow
largely on its own. Recent data do not inspire confidence. The economy would
typically be creating 300,000 jobs a month at this stage in the cycle, but instead
some 125,000 were lost in June. New single-family home sales plummeted in May,
highlighting the fact that the weak property market continues to weigh on the
economy. Our forecast for the US is much more pessimistic than the consensus;
we expect GDP growth of 3.3% in 2010 and 2% in 2011.
Elsewhere, the supposedly moribund Japanese economy is doing remarkably
well. Real GDP grew at a blistering annualised rate of 5% in the first quarter of
2010, largely on the back of strong exports. Japan is benefiting from its proxim-
ity to the booming Chinese market. But it is still struggling to revive domestic
demand. Deflation is entrenched, and policy options are limited. Although we
have raised our GDP forecast for 2010 to 3%, we expect growth to slow to just
1.3% next year once the export bounce ends. The strong yen remains a serious
concern for exporters, despite the current boom.
In the euro zone, concerns over government solvency continue to overshadow
all else. However, we still think the economy will continue its weak recovery,
with GDP growth of 0.7% in 2010 and 0.8% in 2011. Exports are buoyant thanks
to the weak euro and the global recovery. This is benefiting countries such as the
Netherlands and Germany (some German exporters are even struggling to keep
up with demand). But some of the weaker euro economies, such as Greece and
Portugal, lack the export bases to really exploit the upturn in external trade.
Meanwhile the debt crisis continues to raise questions about the viability of the
euro area. A joint EU/IMF programme to restore market confidence has had only
a marginal impact, and several euro area countries may now be beyond rescue
even if they try to cut budgets aggressively. We think Greece, for example, will
eventually default, probably in 2012.
We expect Greece to default on itsdebt, probably in 2012
The US economy should be creatingmore jobs at this stage in therecovery
OECD leading indicators(% change, month on month)
Source: OECD.
-3.0-2.5-2.0-1.5-1.0-0.50.00.51.01.52.02.5
ChinaGermanyJapanUS
100908070605040302012000
Global outlook summary 3
© The Economist Intelligence Unit Limited 2010 gfs.eiu.com Global Forecasting Service August 2010
Emerging mmarketsMany developing countries have come through the crisis relatively unscathed,
and are now growing robustly. Asia has led the way, owing to a combination of
heavyweight fiscal packages and a recovery in global trade. China’s economy
grew rapidly in 2009 thanks to the government’s huge stimulus programme and
its cajoling of banks to increase lending. Chinese growth will accelerate to 9.9%
this year but will slow to 8.3% next year in response to policy tightening.
Elsewhere, central and eastern Europe has put the worst of the crisis behind it.
But the regional economy will grow by only about 3% to 3.5% a year in 2010-11,
because of high unemployment, governments’ weak finances and sluggish
growth in the euro zone—the region’s dominant trading partner. Foreign banks
and investors will also remain wary of committing funds to the region again.
Latin America is recovering well, but the going will be tougher next year. Chinese
stimulus spending initially boosted the region’s commodity exports, and in the
past six months the pick-up in the US economy has also benefited countries, such
as Mexico, that are more dependent on the US market. However, both China and
the US are set to slow in 2011. Latin American growth will therefore moderate too.
In the Middle East and Africa, higher oil prices, the pick-up in global growth and
Chinese demand for raw materials are driving the region’s economies. Weakness
in the euro area remains a problem for parts of North Africa, because of the
impact on exports and worker remittances. In the Middle East and Africa as a
whole, we expect real GDP growth of about 4.5% a year in 2010-11, helped vari-
ously by loose domestic policy, rising commodity prices and higher oil output.
Exchange rratesThe main story in the first half of 2010 has been the euro, which has come under
intense pressure as the European debt crisis has escalated. The US dollar, Japanese
yen and Swiss franc have appreciated against the euro as investors have sought
safe haven in these currencies. The euro has rallied a bit since hitting a low of
US$1.19:€1 in June, but this largely reflects the unwinding of record short positions
that traders had built up against the European single currency. Once these techni-
Latin American growth will softenonce the Chinese and USeconomies slow
Euro wobbles(daily US$:€ exchange rate)
Sources: Federal Reserve Bank of New York; Haver Analytics.
1.0
1.1
1.2
1.3
1.4
1.5
1.6
JJMAMFJDNOSAJJMAMF2009 2010J
4 Global outlook summary
Global Forecasting Service August 2010 gfs.eiu.com © The Economist Intelligence Unit Limited 2010
cal dynamics have played out, we think the euro will soften again. Concerns
about debt sustainability could also hurt confidence in the dollar and yen, but on
balance we think there will be stronger downward pressure on the euro in 2010-
11. Interest rates will also increasingly favour the dollar in the next two years.
In emerging markets, the main news has been China’s loosening of its currency
peg to the US dollar, a move aimed at deflecting criticism (particularly in the US)
of Beijing’s weak-renminbi policy. But the change will not have a big effect on
currency movements, and we expect the ever-cautious Chinese authorities to let
the renminbi appreciate only very gradually.
CommoditiesCommodity prices slumped in the second quarter of 2010 on concerns about
the euro and signs of monetary tightening in China. However, this hasn’t mate-
rially changed our commodity-price forecasts, as prices had run well ahead of
fundamentals earlier in the year. China will continue to buy large quantities of
raw materials, but official efforts to cool the economy will begin to dampen its
demand for commodities in the second half of 2010.
Oil prices have been volatile. We think the price of a barrel of oil will average
US$80 in 2010. Market fundamentals suggest there is little scope for prices to
rally strongly, as global oil stocks are high and OPEC member states still have
ample spare capacity. The price of oil will fall slightly, to US$78.5 a barrel, in 2011
as the effects of economic stimulus fade.
World economy: Forecast summary2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Real GDP growth (%)World (PPP* exchange rates) 4.4 5.0 5.1 2.8 -0.7 4.2 3.6 4.0 4.1 4.2
World (market exchange rates) 3.6 4.0 3.9 1.7 -2.2 3.2 2.6 2.9 3.0 3.1
US 3.1 2.7 2.1 0.4 -2.4 3.3 2.0 2.1 2.3 2.4
Japan 1.9 2.0 2.3 -1.2 -5.3 3.0 1.3 1.3 1.1 1.1
Euro area 3.7 3.0 2.6 0.8 -4.0 0.7 0.8 1.4 1.7 1.8
China 10.4 11.7 13.0 9.6 9.1 9.9 8.3 8.4 8.2 8.0
Central and eastern Europe 5.6 7.3 7.3 4.6 -5.6 3.1 3.6 4.2 4.2 4.3
Asia & Australasia (excl Japan) 7.3 7.9 8.9 5.6 4.6 7.4 6.5 6.7 6.6 6.6
Latin America 4.9 5.6 5.6 4.0 -2.1 4.1 3.4 4.2 4.1 4.2
Middle East & North Africa 6.1 5.9 5.6 6.1 1.4 4.5 4.4 4.6 4.6 4.8
Sub-Saharan Africa 6.8 6.7 7.0 4.8 0.5 4.4 4.5 5.5 5.0 5.0
World inflation (%; av) 3.0 3.3 3.4 4.9 1.6 2.9 2.7 3.0 3.2 3.3
World trade growth (%v) 7.5 9.1 7.6 3.7 -11.2 6.8 5.3 6.3 6.4 6.3
CommoditiesOil (US$/barrel; Brent) 54.4 65.4 72.7 97.7 61.9 80.0 78.5 82.3 78.3 75.5
Industrial raw materials (US$; % change) 10.2 49.6 11.2 -5.1 -25.6 33.7 5.1 2.5 0.2 0.0
Exchange rates (av)¥:US$ 110 116 118 103 94 93 93 93 92 92
US$:€ 1.25 1.26 1.37 1.47 1.39 1.26 1.19 1.18 1.18 1.21* PPP = Purchasing power parity.
Source: Economist Intelligence Unit.
China’s new exchange-rate policywill not lead to rapid renminbiappreciation