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Global Economics Quarterly 1Q 2011

Global Economics Quarterly 1Q 2011

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Published by Rekha M Singal
Global economics quarterly 1Q 2011
Global economics quarterly 1Q 2011

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Published by: Rekha M Singal on Dec 30, 2010
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MacroGlobal EconomicsQ1 2011
A mis-firing growth engine
Upward revisions to growth......but problems remain in the financial engine room......as the West learns more about the long-term costs of the crisis
Disclosures and Disclaimer
This report must be read with the disclosures and analystcertifications in the Disclosure appendix, and with the Disclaimer, which formspart of it
By Stephen King, Karen Ward and Madhur Jha
1MacroGlobal EconomicsQ1 2011
The good news…
The global economy looks a whole lot happier than it did six months ago. Fears of a double-dip havefaded. At the start of 2011, we are raising our growth forecasts (again). For the world as a whole, weexpect growth of 3.3%. Once again, the emerging world is setting the pace, with growth of 6.4%compared with a much more modest 2.3% for the developed world. Nevertheless, there are one or twohighlights within the developed world, most obviously a big upgrade to our numbers for the US, helpedalong by the recently-announced tax changes for 2011 and 2012.Inflation offers a mixed picture. In the developed world it is rather too low, one reason why we see nolikelihood of an early increase in interest rates. The Federal Reserve is likely to persist with itsprogramme of quantitative easing in 2011, desperate to prevent very low inflation from turning intodeflation. In the emerging world, the strength of economic activity has reignited inflation fears. However,rather than accepting the need for major currency revaluations alongside significantly higher interestrates, it seems likely that many emerging nations will choose, instead, to pursue various forms of ‘quantitative tightening’.
…and the not such good news
While this cyclical news is mostly encouraging, the structural position is a lot more disturbing. MostWestern economies are still a long way short of the paths they had been on before the crisis began so,although growth is picking up, the pace of recovery is still disappointingly weak: the high rate of USunemployment simply emphasises the point. The lacklustre nature of the recovery is all the moreremarkable given the scale of the policy stimulus on offer. Yet there is an obvious explanation: Westernnations are suffering from a toxic mixture of high debts and, by past standards, low incomes. The impliedde-leveraging simply reduces the effectiveness of standard macroeconomic policy.This is leading to strains in the financial ‘engine room’ of Western growth. Is there a way of shifting theburden of debt to somebody else to allow growth to lift off?This process is already underway. US companies are in a relatively healthy position largely because theyhave slashed costs. Their income gains have made their debts more easily digestible but only at theexpense of income losses elsewhere, most obviously in the form of the aforementioned savage increase inUS unemployment. And, as attempts to shift the burden of debt intensify, there is a mounting risk of elevated financial uncertainty. In the Eurozone, the big problem lies in determining the relativeresponsibilities of creditor and debtor nations: in the single currency area, sovereign debt is,uncomfortably, taking the strain. Funnily enough, the same could be said about the global economy where
2MacroGlobal EconomicsQ1 2011
the US is the major debtor and China, Russia and Saudi Arabia are major creditors. At the global level,however, the risk lies with currency wars rather than sovereign upheavals.For the Eurozone, the ultimate solution to the current crisis is likely to include some form of ‘Act of Union’, a political settlement that will more clearly define the responsibilities of both creditors anddebtors and which includes more clearly-defined punishments for those which fiscally misbehave(including, perhaps, a temporary suspension of fiscal sovereignty). This will take time, suggesting thatfinancial uncertainties are not going to disappear any time soon.
HSBC growth and inflation forecastsGDP Emerging elation, Western stagnation___________(30 Sept 2010)_____________ ____________Latest_____________2010 2011 2010 2011World 3.5 2.9 3.8 3.3Developed 2.4 1.8 2.6 2.3Emerging 7.2 6.2 7.4 6.4
US 2.7 2.5 2.9 3.4UK 1.4 1.4 1.7 1.7Eurozone 1.6 1.3 1.7 1.5Japan 3.0 0.7 4.3 1.1Brazil 7.5 5.1 7.8 5.1Russia 3.8 3.5 3.2 4.8India 8.8 8.6 9.2 8.0China 10.0 8.9 10.0 8.9
Inflation Emerging elation, Western stagnation___________(30 Sept 2010)_____________ ____________Latest_____________2010 2011 2010 2011World 2.3 2.2 2.4 2.5Developed 1.3 1.2 1.4 1.4Emerging 5.6 5.4 5.7 6.0
US 1.6 0.9 1.6 1.4UK 3.2 2.9 3.3 3.2Eurozone 1.6 1.6 1.6 1.8Japan -1.1 -0.5 -1.1 -0.7Brazil 4.9 5.4 4.9 5.4Russia 7.0 9.5 6.9 9.5India 10.7 5.4 11.8 7.1China 2.9 2.5 3.3 3.9
Source: HSBC
As for the global story, although the US would like to see a weaker dollar, its foreign creditors know fullwell that a weaker dollar will feel to them like a default (their holdings of Treasuries and so on would beworth less in domestic currency terms). Put another way, the problems are similar but the solutions vary:while the risk of default continues to plague the Eurozone, the global equivalent is a dollar meltdown asemerging nations finally recognise that a permanent attachment to the US currency leaves them heavilyexposed to the Federal Reserve’s (ab)use of the printing press.Attempts to shift the burden of debt are, therefore, likely to lead to greater uncertainty within financialmarkets, one reason why the gold price is so elevated today. And, ultimately, these ‘quick fixes’ are likelyto make little difference to the underlying momentum of economic growth. The evidence from earlierepisodes of financial excess is that economies never return to their earlier, credit-dependent, trend levelsof economic activity. Instead, policymakers eventually have to accept the limitations of macroeconomicpolicy: failure to do so will, in our view, merely increase financial instability over the long term.

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