GDP growth softened to 1.8% in the firstquarter as consumer spending andconfidence was hit by oil gasoline prices.After two strong months, job creationweakened in May, raising doubts aboutfirms’ willingness to hire.We assume that current weakness is asoft patch and that the economy willregain momentum in the second half.Fiscal tightening and deleveraging willconstrain medium-term growth rates.A large overhang of houses is preventinga recovery of the property market, withan adverse impact on households’balance-sheets.
A strong first quarter augurs well forGermany and other “core” countriesbut fiscal austerity and high borrowingcosts will hold back the periphery.Unable to return to the markets in2012, Greece needs a top-up loan.We assume the EU/IMF will disbursethis although the German governmentis insisting on “bailing in” the privatesector, an idea opposed by the ECB.Portugal received a €78bn bailout inMay 2011. We expect Spain to meetits funding needs in the markets
The March 11th earthquake and tsunamiare having a servere impact on powersupplies and supply chainsWe have revised down our 2011 GDPforecast to -0.5%. The second quarterwill be dire but we expect a recovery inthe second half, boosted by a rebound inmanufacturing and by reconstructionactivityCoordinated international action wastaken in March to stem the appreciationof the yen
In China massive stimulus hasaggravated existing imbalances.Further tightening of monetary policyis needed to tame inflation.Elsewhere in the emerging world,monetary tightening is needed tocheck inflation. Growth is expected toremain strong on the back of robustdomestic demand.Growth in Brazil will slow to 4% as thecental bank tightens policy to controlinflation.Russia’s recovery will be supported byhigher oil prices
Oil consumption will continue to growstrongly in 2011, led by thedeveloping world. Consumption isexpected to fall in the EU and JapanDespite the collapse of Libyan output,significant spare capacity in OPECsuggests ample supply. However, anyescalation in geopolitical tensionscould disrupt our supply forecastsLoose global monetary conditionsand investors’ search for return willsupport prices
Demand is expected to weaken asmonetary tightening bites in thedeveloping world and as stimulus iswithdrawn in the mature economiesHowever, rising emerging marketincomes and urbanisation will underpinmedium-term demand growthYears of underinvestment, particularlyin agriculture, will support pricesGold prices will come under pressurein 2012 as interest rates start to riseand investors reduce their holdings
Amid high unemployment the FederalReserve will not raise its policy rateuntil late in 2012.The ECB raised its policy rate by 25basis points to 1.25% in April. Weexpect one more increase in 2011,followed by a further two in 2012.The ECB has made clear itsunwillingness to buy more peripheraleurozone government bonds.Japanese policy rates will be held atemergency levels until late 2012.
The euro is being supported by apositive interest differential in relation tothe dollar, despite debt stresses in theeurozone peripheryThe yen will be supported by Japaneseinstitutional investors’ home bias but adeclining domestic savings rate willmake it vulnerable in the medium termEmerging market currencies willcontinue to be supported by wideinterest rate and growth differentialswith OECD economies
- Oil prices remain at extremely high levels 16- Major sovereigns default as public debt surges 16- New asset bubbles burst, creating renewed financial turbulence 16- China’s economy crashes 15- Tensions over currency manipulation lead to a rise in protectionism 12
- Developed economies suffer stagflation 10- The US dollar crashes 10- The euro zone breaks up 10- Economic upheaval leads to widespread social and political unrest 9+ Oil prices slump 8