SocGen: Here's Where The World Is Heading

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The persistent European debt crisis, the messy U.S. fiscal situation, and the slowing Chinese economy all continue to pose threats to the global economy in 2012.Lately, sentiment has turned  more positive driven in large part by the ECB’s long term refinancing operation (LTRO). Also, U.S. data has improved on driven by a dip in household savings, monetary easing, and an unseasonably warm winter.

But the current optimism is “only a temporary bright spell,” write SocGen’s economists in a new research note.  They argue that the problems of plaguing the global economy can’t be fixed through balance sheet expansion.

Country notes from SocGen’s new Global Economic Outlook report examine in great depth the health of the world’s major economies. We combed through the report and pulled out the major macro concerns and predictions.

United States: 'The growth spurt won't last'

Despite the bounce in Q4, neither the components of GDP growth, nor the momentum bode well for Q1. Moreover, inventories which are not a sustainable source of growth, were a huge boost to Q4 GDP growth.

Growth doesn't seem to be strong enough to reduce excess slack (defined as the unused portion of the economy's productive capacity including underutilized industrial space, housing and labour) in the economy.

Europe remains a risk to the U.S. economy, moreover, politics are driving the economic outlook this year. As the economy slows in Q1 economy wide profit growth is also expected to ease.

Source: Societe Generale

China: 'A highly challenging first half'

Economic growth in China is expected to decelerate in coming quarters but there's only a 20 per cent chance of a hard-landing. Beijing can prevent a hard-landing, but after years of investment driven growth, China is expected to experience some pain as it begins to rebalance its economy.

The biggest risk at the moment is over-tightening of the housing sector. Nearly 40 per cent of bank loans are collateralized on property and land values and the combination of both could be overwhelming for policymakers.

Risk from China's shadow banking and local government debt is real but it's unlikely to become a full blown banking crisis.

Source: Societe Generale

Japan: 'Reconstruction demand to keep Japan growing'

Japan's economy contracted sharply after the earthquake in March 2011 but posted a strong recovery in the third quarter. SocGen is however bullish on the Japanese economy going into 2012 projecting a 2.4 per cent growth rate.

The above 200 per cent debt-to-GDP ratio seems sustainable and a fiscal crisis looks unlikely in the near term. And, a deepening sovereign crisis in Europe is the chief risk to the world and to Japan.

Source: Societe Generale

UK: 'Stagnant output but not a double dip'

A technical recession is possible but a sustained decline is unlikely. GDP is expected to hover close to zero through the middle of 2012, before rising in Q3 because of the Olympics.

Short term growth is being hurt by the fiscal programme, and a deterioration in the European debt crisis is the biggest risk to the UK.

Source: Societe Generale

Germany: 'Sharp slowdown on fiscal shock elsewhere'

2012 GDP forecast is unchanged at 0.8 per cent, despite the growth outlook downgrade for many euro area economies.

Fiscal policy is expected to be mildly expansionary after public sector deficit missed its 2.5 per cent target, and came in at just 1 per cent of GDP. Export growth is expected to slow to 4 per cent in 2012, from 8 per cent in 2011.

Source: Societe Generale

France: '2012, the year of challenges'

The government has lowered its growth forecast to 0.5 per cent for 2012, and is expected to meet the deficit target of 4.5 per cent of GDP. The biggest challenges will stem from the presidential elections.

The 2013 and post-presidential election budget bill will be closely watched and the new government will have to take on tough structural measures.

The biggest risks to the French economy include a deterioration of the European debt crisis and its implications for credit channels and export markets, a rise in oil prices, and a downgrade in its credit rating.

Source: Societe Generale

Italy: 'The recession has barely started'

Italy's recession is expected to be deeper than expected and GDP is expected to contract by 1.6 per cent in 2012, and 0.6 per cent in 2013. Italian workers are likely to see their real wages decline, and this is expected to impact domestic demand and households' ability to repay their debts.

Italy's biggest problem is not deficit reduction, but long-term and sustained debt reduction, while improving GDP growth. Prime Minister Mario Monti has begun implementing reforms to tackle these problems but is likely to face political opposition.

Source: Societe Generale

Spain: 'Double dip recession as fiscal squeeze intensifies'

The Spanish economy is under pressure from many areas, namely, the multi-year fiscal austerity to reduce the public sector deficit, declining property prices, the downscaling of its construction sector, and a credit crunch as the banking sector consolidates. Exports appear to provide the only real boost to the economy.

The biggest risks to the Spanish economy include more stress on its financial market, a persistent credit crunch and weaker global growth.

Source: Societe Generale

Sweden: 'On stand-by, hoping for a shallow slowdown'

Sweden is expected to grow 1.2 per cent in 2012 and a technical recession can be avoided. Weak growth is expected to pressure public finances and there is room for monetary policy action if the outlook deteriorates.

A sharper correction in the housing market could see domestic consumption ease.

Source: Societe Generale

Norway: 'Too many demands on Norges Bank'

Annual growth is expected to moderate to 2 per cent in 2012 and stay below potential for most of the year. Inflation has also been lower than expected because of lower than expected energy prices. This leaves room for Norges Bank to implement rate cuts.

There will be pressure on Norway's central bank to maintain financial stability, support the export sector, and jobs.

Source: Societe Generale

Switzerland: 'Testing times for Swiss National Bank'

The Swiss National Bank (SNB) president resigned amid charges that his family members had been benefiting from currency trades. While the SNB is now expected to see improvements in its internal rules and transparency, it is also expected to face difficulties in terms of political demands on limiting its powers.

Meanwhile, GDP growth is expected to slow to 0.5 per cent because of weakening external demand and strong currency. With monetary policy restrained, Switzerland will have to turn to fiscal policy to improve consumption.

Europe's sovereign debt crisis continues to be a risk to the economy but easy credit and rising home prices provide upside risks.

Source: Societe Generale

Australia: 'Global uncertainties rival the investment boom'

'We are still moderately optimistic about Australia's recovery prospects in the coming years on the back of the resource sector investment boom. However, downside risks to Australia's economic growth will increase substantially in 2012...'

Europe's risks are already priced into SocGen's outlook for Australia. But the deterioration in the European, Chinese and American economies could impact the resilience in the Australian economy.

Growth in Australia's housing sector is soft and manufacturing and tourism are still adjusting to strong currency.

Source: Societe Generale

South Korea: 'A fiscal stimulus in an election year'

Growth is slowing in South Korea and it is expected to grow 3.4 per cent in 2012. But this could be a good thing since the economy was clearly overheating at the start of 2011. In the long term South Korea needs to watch for inflation risks.

The South Korean economy will see private capital investment contract in 2012, private consumption is expected to ease because of inflation.

Source: Societe Generale

Russia: 'Smooth sailing with fiscal winds'

A slowdown in Russia's economy is expected to be offset by the government's planned fiscal expansion, resilient oil prices, and the economy's ability to contain spillover from Europe's economic crisis. Growth in consumer demand is expected to stay strong at the start of 2012, but is expected to moderate as credit conditions worsen.

The biggest risks to the Russian economy are global slowdown and a Chinese hard-landing, as it could pull down commodity prices, hit business and consumer confidence, raise questions over budget sustainability and put RUB under substantial pressure. Domestically, protests around the upcoming presidential elections continue to be a big risk.

Source: Societe Generale

Poland: 'Closer to monetary policy tightening'

The Polish economy is less open than others in the region and public and private investment are expected to support the economy in 2012.

New inflation and GDP projections, along with the Forex situation will be crucial in making future monetary policy decisions.

Source: Societe Generale

Czech Republic: 'Czech economy on the edge of recession'

The Czech economy and Czech banks are in good shape with surplus capital and sufficient liquidity. The government is expected to continue fiscal consolidation as its tries to lower the budget deficit to below three per cent of GDP in the coming years.

The contribution of exports to GDP is expected to increase because of favourable developments in foreign trade. But the outlook for consumption is expected to weaken because of lower wages. A deterioration in the European debt crisis could however hurt the export oriented Czech economy.

Source: Societe Generale

Slovakia: 'Challenging year for Slovak public finances'

Slovakia's economy largely depends on economic development abroad, especially that of its main trading partners like Germany and the Czech Republic. The country is preparing for early parliamentary elections in March.

Net exports are expected to make the most positive contribution to GDP growth, but weaker foreign demand is expected to lower the export activity of Slovak producers, and impact the labour market and domestic demand.

2012 will be very challenging for Slovakia, because of the government's 2013 objective for a public finance deficit below 3 per cent. SocGen analysts do not think the deficit target is achievable. Fiscal consolidation will depend on upcoming elections.

Source: Societe Generale

Romania: 'Moving slowly, but forward'

The Romanian economy is expected to be hit by the mild recession in the eurozone mostly through its impact on trade. Easing by the Romanian central bank however is expected to revive domestic consumption.

Meanwhile, the government's commitment to structural reforms might boost investor perception of the country's progress. Last year, Romania's GDP growth was boosted by a strong agricultural harvest, that will prove harder this year with a prolonged drought. Elections are also expected to increased 'risks of fiscal slippages'.

Source: Societe Generale

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