By Brai Odion-Esene
WASHINGTON (MNI) – While there is a significant chance that the
U.S. economy could get stuck in a “near-zero growth rut,” it is much
less likely that another cyclical downturn is imminent, according to the
Institute of International Finance.
“So far, the economy is showing few of the typical symptoms
associated with a recession (such as layoffs or sharp reductions in
business investment and inventories),” Washington-based banking group
said in its latest Global Economic Monitor.
The report, published late Thursday, sees U.S. growth in 2013 at a
subpar 2.4%, a modest acceleration from the 1.6% and 1.8% projected for
2011 and 2012, respectively.
“We believe that the U.S. recovery will remain quite anemic,” the
IIF said, “leaving the economy with a persistently large output gap and
an unusually high level of unemployment of around 8% at end-2013.”
“In our view, the key factor weighing on the outlook will be
continued balance sheet repair in the private sector, combined with a
bias towards fiscal consolidation.”
With regard to the stuttering global economy, the IIF report
predicted that it will be “airborne in a moment. This remains our
central forecast.”
The report forecasts the global economy to grow by 3.4% this year
— from 4.4% in 2010 — and by 3.6% in 2012.
The weakness in the global economy so far in 2011 has been largely
explicable, it said, reflecting either the shock of the Japanese
earthquake; the rise in global food and energy prices; or as a fallout
of policy tightening (fiscal in mature countries; monetary in emerging
economies).
And there are already clear signs of Q3 acceleration from the
weakness seen in the second quarter, the report said. It added that this
rebound will be hurt by recent market turmoil, but helped by recent
monetary easing.
“The bad news, however, is that even in this ‘good’ scenario the
airborne economy is flying dangerously close to stall speed,” the IIF
warned. “The simple fact seems to be that the G7 is caught in slow
growth trap, in which debt problems are apt to intensify.”
The IIF expects recent market turmoil to subtract from activity in
the months ahead, especially by further dampening already soft consumer
spending. For the major economies, it now projects GDP growth to be 1.8%
in the second half of 2011. Last month, the IIF had projected H2 growth
to be 2.1%.
Looking ahead, the IIF said some of the transitory drags on mature
economies will fade — especially the impact of the Japanese disasters
— which should support an acceleration of GDP growth in the mature
countries in the second half relative to the first. In addition, oil
prices have also already dropped significantly and global food prices
have been generally stable for the past six months.
“Most emerging market central banks have stopped tightening and
some have even begun to ease, although it will presumably take some time
for such support to begin to show up,” the report added.
It went on to warn, however, that two important negatives have
intensified. First, financial market weakness since late July has caused
a sharp drop in business and consumer confidence measures, which could
be a signal of yet more demand weakness.
Second, pressures on banks to de-lever and on governments to
retrench have intensified, which could also weaken global demand more
than currently projected in the quarters ahead.
Overall, the report is projecting 1.4% real GDP growth in mature
economies this year, before settling around 2% in 2012-13. The Euro area
is projected to grow by 1.7% this year and 1.3% in 2012. Economic
activity in Japan, however, is expected to contract by 0.3% this year
but then accelerate to growth of 2.8% in 2012.
By comparison, China is expected to grow by 9.5% this year and 9.0%
in 2012, while India is expected to grow by 7.8% in 2011 and 8.2% next
year.
The IIF said its outlook for the mature economies is the result of
a mix of factors. On the supportive side, global monetary policy is
projected to remain extremely easy. “This extremely easy monetary policy
is operating against a backdrop of a high degree of slack in the major
economies, suggesting that there is plenty of room for solid growth
without sparking any inflation pressures, at least of domestic origin,”
the report said.
Fiscal policy, on the other hand, will be tight, and the report
said the deleveraging process in the private sector looks set to
continue, “implying that the transmission mechanism between easy money
and final demand will continue to sputter.”
The IIF report also included an outlook for the oil market, and it
predicted that the slowing global economic recovery will temper oil
demand, prompting IIF economists to reassess their oil price forecasts.
“In our view, the Brent oil price will continue to decline
throughout the year, reaching $105 in early-2012 and $100 in
early-2013,” the report said. “We look for Libya’s restoration of oil
production to put downward pressure on the Brent oil price, especially
in early 2012. Moreover, we project the WTI/Brent spread to narrow
steadily.”
But despite weaker global growth, IIF expects the oil market to
remain relatively tight through the balance of 2011 and into 2012. In
part, this is because of the Libyan crisis, which has taken about 1.5
million barrels per day off global oil markets in the past year, but
also because non-OPEC production has been weaker.
Given Libya’s slow return to production, the IIF estimates that the
gap between world oil demand and supply will be around 1.4 million b/d
in Q3 and 1.2 million b/d in Q4, a shortfall that will be met through
inventory drawdowns.
** Market News International Washington Bureau: 202-371-2121 **
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