The Economist Intelligence Unit (EIU) wrote an interesting study this month assessing the delicate state of the global economy and limited prospects for growth this year and for 2013 by region.
For any firms buying, selling or exposed to commodities driven by global growth trends (and which aren’t?), the report makes interesting reading. See my colleague’s recent report on the WTO’s global trade growth outlook.
Encouragingly the EIU still expects global GDP at purchasing power parity (PPP) to grow by 3.1 percent this year, but they have revised their outlook for a recovery in 2013, saying it will be slightly weaker than previously forecast. Global growth next year they say will be 3.5 percent at PPP exchange rates.
This marks a downgrade from 3.6 percent last month and reflects the continuing slowdown in major economies — notably, growth in the US, which decelerated for a second straight quarter in April-June and is now growing at less than half the pace it was at the end of last year.
The Eurozone remains mired in recession, according to the EIU, a topic we will come back to shortly, while China, increasingly an engine of global as well as Asian growth, is expected to fall below 8 percent this year for the first time since 1999.
The report (as have the markets) takes encouragement from the European Central Bank (ECB)’s announcement to buy Spanish and Italian government bonds in potentially unlimited quantities. Certainly investors seem reassured – bond yields have dropped as a result, although they are still painfully high and everyone is conveniently ignoring the fact this is being done on borrowed money that will have to be met some day.
What the report does not discuss (and is of more concern to us as a source of continued strife in Europe) is the state of the banks.
Recapitalizing of Spanish banks has barely begun and French banks are holding frighteningly high levels of southern European debt, both state and private, which has yet to be recognized.
While France has been part of the northern European core, pushing austerity on its southern neighbors in return for support, Francois Hollande’s leftist government has so far reversed austerity measures from his predecessor, such as extensions of the age of retirement – which do not auger well for France’s intent to balance its own budget or reduce its rising debt.
Optimistically the EIU is predicting negative growth in the EU to be reversed next year and a meagre 0.4 percent growth to be achieved in 2013. If it does rise, it will have to come wholly from the northern Germanic and Scandinavian states; we can’t see France or the southern states doing anything but drag the others down next year.
And what about the US?
Continued in Part Two.