Weekly Economic Commentary

New Paradigm in Global Growth

For the third year in a row, as April turns into May, global financial markets are growing concerned over a slowdown in global economic activity and from a U.S. perspective, we continue to monitor several key metrics.  But the U.S. economic growth profile tells only part of the story, and in this publication we outline the growth profile of the rest of the world (Europe, Japan, China, and Emerging Markets, etc.) and put the evolving composition of the global economy into perspective. On balance, while our forecasts for economic growth in the United States, Europe, and China have not changed, there have been some noticeable shifts in the forecasts for economic growth around the globe in 2012 and 2013 made by the consensus and by the International Monetary Fund (IMF).

Fed Forecast: Moderate but Above-Consensus Growth

Last week (April 23 – 28), the Federal Reserve’s policymaking arm, the Federal Open Market Committee (FOMC), released its latest forecast for the U.S. economy, pegging real Gross Domestic Product (GDP) growth at around 2.6% this year and at 2.9% in 2013. The forecasts for both years were very close to the forecasts made by the FOMC in January 2012. The forecast for 2012 made last week was about the same as the forecast the FOMC made last fall (November 2011), while the latest 2013 forecast (2.9%) was 0.4% lower than the 3.3% forecast by the FOMC last fall.

As has been the case for the past several years, the FOMC’s outlook for the U.S. economy in the next few years is a bit rosier than the consensus of Wall Street economists. Bloomberg News surveyed 75 economists in mid-April 2012, and they forecast 2.3% GDP growth for the U.S. economy in 2012, and 2.5% in 2013. The LPL Financial Research forecast for 2012 remains a below-consensus 2.0%, a forecast we first made in the fall (November) of 2011. Back in November 2011, the Bloomberg consensus pegged GDP growth at 2.2% in 2012 and 2.5% in 2013, little changed from the most recent consensus forecasts. As an aside, this group puts the odds of recession in the next 12 months at 20%, down from 25% odds back in November 2011.

Consensus Views on Global Growth Mixed

We can also turn to the Bloomberg consensus forecast to take a broader view of the global economic forecast, and how that view has shifted since last fall. The latest round of forecasts from the IMF can also shed some light on the progression of forecasts for 2012 and 2013.

The latest Bloomberg consensus puts global GDP growth in 2012 at 3.4% and growth in 2013 at 3.9%. Both forecasts have been revised down only slightly over the past six months, as the consensus forecast 3.6% growth in 2012 and 4.0% growth in 2013 back In November 2011. The IMF released its economic forecast for 2012 and 2013 in mid-April 2012. It now forecasts global GDP growth at 3.5% in 2012, and 4.1% in 2013. The IMF forecast for 2012 is 0.5% lower than the forecast made in October 2011, while the 2013 forecast is little changed over the past six months.

A closer look at the IMF forecasts reveals that the forecasts for economic growth this year and next in both developed economies (United States, Europe, the United Kingdom, Japan, Canada, Australia, etc.) and in emerging markets (Brazil, India, China, etc.) continue to get revised lower, albeit modestly so. It is important to point out, however, that economic growth in emerging markets continues to run roughly three times as quickly as growth in the developed world, and that the downward revisions to growth in developed markets are more pronounced than the downward revisions to growth in the emerging markets.

Divergence Persists in Regional Growth Forecasts

Digging a bit deeper into these IMF forecasts for 2012 and 2013, we find that the IMF continues to expect a mild recession in Europe in 2012 (-0.3% GDP growth), as modest growth in Germany and France is more than offset by moderate to severe recessions in Italy and Spain. The 2012 outlook for Europe has deteriorated markedly since last fall, mainly as a result of the slowdown in China and the fiscal austerity being imposed in many European nations. We also note that the IMF’s outlook for Japan for 2012 and 2013 has held steady since last fall. Data released this week (April 30 – May 4) are likely to reveal that GDP in several Eurozone economies contracted in the first quarter of 2012. The GDP data for the entire Eurozone is due out in mid-May.

According to the IMF’s forecasts, China is expected to grow at 8.2% this year and 8.8% next year, and so the IMF agrees with our view (and the consensus view, as well) that China can achieve a soft landing in 2012 and 2013. But China has clearly moved into a new phase of its economic growth trajectory after GDP growth surged over the past 10 years. Looking ahead, markets and global policymakers need to adjust to Chinese GDP growth of around 7.5%, rather than the 11 – 12% growth seen in much of the 2000s. Chinese authorities have begun easing monetary policy again (after tightening in 2010 and 2011) and are easing lending standards in some areas of the economy as well. Risks remain in China, however, including the economic and financial implications of a possible property bubble, as China continues its transition from an export-led, externally-facing economy, to a more consumer-led, internally-driven economy, similar in composition to the economies in the developed world. China has come a long way since it burst back on to the global economic stage in the late 1990s and early 2000s, but still has a long way to go.

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The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Stock investing involves risk including loss of principal.
The Federal Open Market Committee (FOMC), a committee within the Federal Reserve System, is charged under the United States law with overseeing the nation’s open market operations (i.e., the Fed’s buying and selling of United States Treasure securities).
The Federal Open Market Committee action known as Operation Twist began in 1961. The intent was to flatten the yield curve in order to promote capital inflows and strengthen the dollar. The Fed utilized open market operations to shorten the maturity of public debt in the open market. The action has subsequently been reexamined in isolation and found to have been more effective than originally thought. As a result of this reappraisal, similar action has been suggested as an alternative to quantitative easing by central banks.
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