December 2, 2009Issue No: 09/43
Global Economics WeeklyGoldman Sachs Global Economics, Commodities and Strategy Research
The Outlook for 2010/2011: Exciting, with Risks!
As has become the norm, at this time of the year we present our updated economic forecasts for the followingyear, and unveil our forecasts for the year after that.Today, we announce our updated forecasts for 2010, andunveil our 2011 forecasts for GDP and inflation.We are also releasing our initial ‘Top Trades’ for 2010,something which we hope will stimulate the minds of investors—as is often the case.With respect to GDP growth, according to our forecasts both 2010 and 2011 are going to be rather strong years.We now forecast 4.4% for 2010, and a higher 4.5% for 2011. We are above consensus for next year and, whilethere is no consensus as such for 2011, we suspect we aresignificantly higher than consensus for 2011 also.With respect to inflation, we are below consensus,despite our relative optimism on GDP. If this is correct,the combination of better than expected growth and lower than expected inflation should be good news for financialmarkets. This is reflected in our equity and bond projections, and in our initial ‘Top Trades for 2010’.A key belief of ours—as recognised in these forecasts— is that, despite the credit crisis, the world economy’sgrowth potential is probably around 4%, which doesallow the post-crisis recovery to be stronger withoutgenerating inflationary pressures.Given that our regional growth outlook shows domesticdemand in the BRICs and the wider emerging worldcontinuing to show strong leadership, while domesticdemand in the G7 remains relatively sluggish, thefinancial market outlook is arguably even better.To be more specific, we forecast two consecutive yearswith global GDP growth in excess of 4%, but no increasein short-term interest rates in the US! This would appear to be rather positive for risky assets, potentially sowingthe seeds for fresh asset overvaluations down the road.This in turn—as you can imagine—makes us somewhatnervous about many possible risks out there, includingthose that relate to the Fed tightening earlier than wecurrently expect.
GDP Forecasts vs. Consensus
Compared with this time last year, it is rather pleasing towrite about our GDP outlook. Back in December 2008,we forecast a meagre 2009 GDP growth of +0.6%. Thiswas significantly below consensus of +2.0% but, of course (as we now know), also unfortunately probablytoo high. We hope not to preside over economicforecasts—and the eventual reality—of negative GDPgrowth in the vaguely foreseeable future.Looking at 2010, as we have been since the Spring, whenwe first significantly upgraded our forecasts for 2010 for China, we remain more optimistic than the consensus.This time a year ago, we forecast global GDP growth of +3.1%. Today, we expect 4.4%.For 2011, we are even more optimistic, despite having amodest slowdown in China and Brazil. This is due to amodest acceleration in the G7 countries, notably the UK,as well as a notable acceleration in some other importantcountries, such as India.
Hopefully, these days clients are very aware of our favourite proprietary indicators, which we use to guideour confidence about our forecasts and our objectivity.They are currently rather encouraging, as they have beenfor some months now.Our index of systemic financial stress, our so-called GS-FSI, shows an extremely comforting picture, as it hasdone for many months. Readers are hopefully reasonably
GS FSI At Its Lowest LevelSince the Start of Series in 1990
GS Financial Stress Index
Source: GS Global ECS Research
Real GDP Growth Forecasts
GS Consensus* GS Consensus*USA 0.4 -2.5 -2.4 2.1 2.7 2.4Japan -0.7 -5.2 -5.7 1.5 1.4 1.6Euroland 0.6 -3.9 -3.8 1.5 1.2 1.9UK 0.6 -4.6 -4.5 1.9 1.2 3.4Europe 0.8 -3.7 -3.6 1.7 1.3 2.3China 9.0 8.7 8.5 11.4 9.6 10.0India 6.7 6.6 6.1 8.2 7.6 8.7Brazil 5.1 0.5 -0.4 5.8 4.6 5.0Russia 5.6 -9.0 -7.7 4.5 3.5 5.5BRICs 7.6 5.0 4.7 9.2 7.6 8.6AdvancedEconomies0.6 -3.1 -3.1 2.1 2.1 2.5World 2.7 -0.8 -0.9 4.4 3.8 4.5
* Consensus Economics November 2009. Source: GS Global ECS Research