April 2011 EIU Global Economic Forecast

Global economic forecast April 8th 2011

A new round of fiscal stimulus, together with continued QE, will maintain the momentum of the recovery in 2011
Persistently high unemployment is a serious concern, but firms should be more willing to hire this year
The deleveraging process still has several years to run and will weigh on medium-term economic growth.
A large overhang of houses will prevent a recovery of the property market

Germany and the core are growing strongly but fiscal austerity and high borrowing costs will hold back growth in the periphery
An increase in the financing available to distressed euro zone member states has led to an improvement in sentiment. But these measures will not resolve the underlying solvency crisis
We expect Portugal to need a bailout in 2011 but Spain to meet its funding needs in the markets

The extent of the impact on the economy of the earthquake, tsunami and damage to a nuclear reactor is unclear.
For the time being we have revised down our 2011 GDP forecast from 1.6% to 1.4%. Further large downgrades are likely if the damage to power supply and other infrastructure lasts for several months.
Risk aversion may cause the yen to appreciate.

In China massive stimulus has aggravated existing imbalances. Further tightening of monetary policy is needed to tame inflation.
Elsewhere in the emerging world, monetary tightening is needed to check inflation. Growth is expected to remain strong on the back of robust domestic demand Brazil will slow as the cental bank tightens policy to control inflation
Russia’s recovery will be supported by higher oil prices

Oil consumption will continue to grow strongly in 2011, led by the developing world. Consumption is expected to fall in the EU and Japan
Output restraint and significant spare capacity in OPEC producers suggests ample supply. However, any escalation in geopolitical tensions could disrupt our supply forecasts
Loose global monetary conditions and investors’ search for return will support prices

Demand is expected to weaken as monetary tightening bites in the developing world and as stimulus is withdrawn in the EU.
However, rising emerging market incomes and urbanisation will underpin medium-term demand growth
Years of underinvestment, particularly in agriculture, will push up prices
Gold prices will come under pressure in 2012 as interest rates start to rise and investors reduce their holdings.

Amid high unemployment the Federal Reserve will not raise its policy rate until the third quarter of 2012
We have brought forward our forecast of the first interest rate rise by the ECB to the first quarter of 2012
The ECB is keen to cease its emergency purchases of peripharal eurozone government bonds
Japanese policy rates will be held at emergency levels until late 2012

On the assumption that EU policymakers restore confidence in EMU, we now expect the euro to weaken somewhat less against the dollar in 2011
The yen will be supported by Japanese institutional investors’ home bias but a declining domestic savings rate will make it vulnerable in the medium term
Emerging market currencies will continue to be supported by wide interest rate and growth differentials with OECD economies

16 16 16 16 15 - China’s economy crashes - New asset bubbles burst, creating renewed financial turbulence - Tensions over currency manipulation lead to a rise in protectionism - Major sovereigns default as public debt surges - There is a sustained spike in oil prices

10 12 10 10 9 - Economic upheaval leads to widespread social and political unrest - The euro zone breaks up - Developed economies fall into a deflationary spiral - The global economy experiences a double-dip recession + Improved confidence prompts a stronger rebound in demand

April 2011 EIU Global Economic Forecast

by Economist Intelligence Unit

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