Economic Prospects - International Outlook

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In the third of our posts this week on Economic Prospects for the year ahead, we turn to the international outlook - key to globally focused and exposed sectors, such as manufacturing. However, we do so against a backdrop of a further round of eurozone crisis meetings as the debate on what to do about Greece (...Ireland and Portugal) looks set to spread to other periphery economies. We'll return to some of the many and potentially sigificant downside risks to our forecast tomorrow.

Our starting point is a strong recovery in global economic activity through 2010 and a decent 2011q1, where the IMF estimated growth of over 4% in the first three months of this year. While emerging economies continued to lead the pack in the first quarter, some advanced economies – notably France and Germany – posted solid quarter-on-quarter growth of 1% and 1.5% respectively.

However, in the first half of this year there have been a number of significant events that economic forecasts couldn't have accounted for – the Japanese earthquake and consequences for global supply chains and production and the spreading social and political tension across the Middle East region.

Even looking through these events the economic data that has begun to emerge for the second quarter of this year raises question marks about whether the global recovery is having a temporary wobble or whether the outlook is for a more prolonged period of weaker growth.

Any forecast for the eurozone this year will inevitably mask huge variations in performance.

In Germany, output is now back to pre-recession levels. With business and consumer confidence indicators continuing to improve in Germany and France, growth for the year as a whole is expected to come at 3.5% and 2.2% respectively. Elsewhere in the eurozone - and looking particularly at the fringes - the challenge of fiscal retrenchment will continue and medium-term prospects for growth look fairly dismal.

In the US, the picture is looking less rosy than only a few quarters ago when growth was fairly broad based across the economy. Recently the US has seen some softening of consumer spending and production, house prices are still falling and consumer confidence levels remain well below those recorded pre-recession. This has led to a downward revision in our central forecast since the start of the year to 2.5% growth in 2011 and 2.9% in 2012. And today the Fed chairman indicated that further monetary policy support was still on the table.

Looking to emerging Asian economies the problems have not been growth but inflation. Commodity prices, including food, have been on a strong upward trend through this year. With concerns of overheating, China, India and Brazil have embarked on significant monetary tightening since 2010 which will inevitably come at the expense of growth this year. China and India should still post respectable growth of 9% and 7.6% respectively. China has set a less ambitious target for growth for the duration of its next five year plan, with a greater emphasis on boosting consumer spending as much of the much needed rebalancing process.

Over the next six months it will become clearer whether the BRIC economies will be able to manipulate a soft landing, Europe can take decisive action on Greek debt woes, Middle East tensions will be contained and the US can maintain momentum behind the recovery and create jobs without another round of stimulus measures. The UK's drive for economic rebalancing means the performance of the wider global economy counts. The multiple risks on the horizon could yet combine to create some very strong headwinds for the global recovery.

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Chief Economist

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