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The European debt crisis, the looming U.S. fiscal cliff and geopolitics continue to be a risk to the global economy.Societe Generale has updated its global economic outlook and expects the euro area to contract 0.4 per cent in 2012 and stay flat in 2013. The U.S. is expected to grow 2.0 per cent in 2012, and 1.8 per cent in 2013, meanwhile, China is expected to grow 7.9 per cent in 2012 and 7.7 per cent the following year.
There are 5 key themes behind SocGen’s revision to its global economic outlook:
- A French diet – “We expect the euro area to adjust the ‚German Diet‛ of austerity, wage restraint and structural reform to a more Mediterranean palette, defining austerity in terms of fiscal measures as opposed to budget deficit targets and introducing some infrastructure spending, leveraging public funds with private ones.” Germany will have to accept higher inflation, a “Grexit” has become a real possibility. The uncertainty shock to the eurozone is behind the downward revision to the 2013 growth forecast for the euro area to 0.0 per cent, from 0.5 per cent.
- MultiplierMysteries- A fiscal multiplier is the ratio of a change in national income to the change in government spending that impacts the national income. For developed economies the fiscal multiplier is just 1 and possibly higher in the weakest euro members. G4 central banks are likely to further expand their balance sheets to the end of 2012 with €500 billion from the ECB, $600 billion from the Fed, £50 billion from the Bank of England and 5 trillion yen from the Bank of Japan. While this would buy the economies some time they can’t single-handed-ly bring back sustainable recovery.
- U.S. economy – The fiscal cliff could take away as much as 3 per cent from 2013 GDP, but SocGen expects a fiscal drag of 1.3 per cent. Job growth is expected to move along at a modest pace, and their analysts anticipate $600 billion of QE3.
- Asia’s bumpy transition – Chinese policymakers aren’t expected to announce infrastructure stimulus anywhere near the amount launched at the time of the subprime crisis. China’s economy is expected to grow 7.9 per cent in 2012 and below 8 per cent for the entire forecast period till 2016. China’s shift to a consumption driven growth is far from being a smooth process and will have ripple effects in Asia.
- Inflation divergence – Oil price forecast has been revised to $107 per barrel on average for the second half of the year down from $25 per barrel from the previous forecast.