New
Paradigm in Global Growth
For the third year in a row, as April turns
into May, global financial markets are growing concerned over a slowdown in
global economic activity and from a U.S. perspective, we continue to monitor
several key metrics. But the U.S.
economic growth profile tells only part of the story, and in this publication
we outline the growth profile of the rest of the world (Europe, Japan, China,
and Emerging Markets, etc.) and put the evolving composition of the global
economy into perspective. On balance, while our forecasts for economic growth
in the United States, Europe, and China have not changed, there have been some
noticeable shifts in the forecasts for economic growth around the globe in 2012
and 2013 made by the consensus and by the International Monetary Fund (IMF).
Fed Forecast: Moderate but Above-Consensus Growth
Last
week (April 23 – 28), the Federal Reserve’s policymaking arm, the Federal Open
Market Committee (FOMC), released its latest forecast for the U.S. economy,
pegging real Gross Domestic Product (GDP) growth at around 2.6% this year and
at 2.9% in 2013. The forecasts for both years were very close to the forecasts
made by the FOMC in January 2012. The forecast for 2012 made last week was
about the same as the forecast the FOMC made last fall (November 2011), while
the latest 2013 forecast (2.9%) was 0.4% lower than the 3.3% forecast by the
FOMC last fall.
As
has been the case for the past several years, the FOMC’s outlook for the U.S.
economy in the next few years is a bit rosier than the consensus of Wall Street
economists. Bloomberg News surveyed 75 economists in mid-April 2012, and they
forecast 2.3% GDP growth for the U.S. economy in 2012, and 2.5% in 2013. The LPL
Financial Research forecast for 2012 remains a below-consensus 2.0%, a forecast
we first made in the fall (November) of 2011. Back in November 2011, the
Bloomberg consensus pegged GDP growth at 2.2% in 2012 and 2.5% in 2013, little
changed from the most recent consensus forecasts. As an aside, this group puts
the odds of recession in the next 12 months at 20%, down from 25% odds back in
November 2011.
Consensus Views on Global Growth Mixed
We
can also turn to the Bloomberg consensus forecast to take a broader view of the
global economic forecast, and how that view has shifted since last fall. The
latest round of forecasts from the IMF can also shed some light on the
progression of forecasts for 2012 and 2013.
The
latest Bloomberg consensus puts global GDP growth in 2012 at 3.4% and growth in
2013 at 3.9%. Both forecasts have been revised down only slightly over the past
six months, as the consensus forecast 3.6% growth in 2012 and 4.0% growth in
2013 back In November 2011. The IMF released its economic forecast for 2012 and
2013 in mid-April 2012. It now forecasts global GDP growth at 3.5% in 2012, and
4.1% in 2013. The IMF forecast for 2012 is 0.5% lower than the forecast made in
October 2011, while the 2013 forecast is little changed over the past six
months.
A
closer look at the IMF forecasts reveals that the forecasts for economic growth
this year and next in both developed economies (United States, Europe, the
United Kingdom, Japan, Canada, Australia, etc.) and in emerging markets
(Brazil, India, China, etc.) continue to get revised lower, albeit modestly so.
It is important to point out, however, that economic growth in emerging markets
continues to run roughly three times as quickly as growth in the developed
world, and that the downward revisions to growth in developed markets are more
pronounced than the downward revisions to growth in the emerging markets.
Divergence Persists in Regional Growth Forecasts
Digging
a bit deeper into these IMF forecasts for 2012 and 2013, we find that the IMF
continues to expect a mild recession in Europe in 2012 (-0.3% GDP growth), as
modest growth in Germany and France is more than offset by moderate to severe
recessions in Italy and Spain. The 2012 outlook for Europe has deteriorated markedly
since last fall, mainly as a result of the slowdown in China and the fiscal
austerity being imposed in many European nations. We also note that the IMF’s
outlook for Japan for 2012 and 2013 has held steady since last fall. Data
released this week (April 30 – May 4) are likely to reveal that GDP in several
Eurozone economies contracted in the first quarter of 2012. The GDP data for
the entire Eurozone is due out in mid-May.
According
to the IMF’s forecasts, China is expected to grow at 8.2% this year and 8.8%
next year, and so the IMF agrees with our view (and the consensus view, as
well) that China can achieve a soft landing in 2012 and 2013. But China has
clearly moved into a new phase of its economic growth trajectory after GDP
growth surged over the past 10 years. Looking ahead, markets and global
policymakers need to adjust to Chinese GDP growth of around 7.5%, rather than
the 11 – 12% growth seen in much of the 2000s. Chinese authorities have begun
easing monetary policy again (after tightening in 2010 and 2011) and are easing
lending standards in some areas of the economy as well. Risks remain in China,
however, including the economic and financial implications of a possible
property bubble, as China continues its transition from an export-led,
externally-facing economy, to a more consumer-led, internally-driven economy,
similar in composition to the economies in the developed world. China has come
a long way since it burst back on to the global economic stage in the late
1990s and early 2000s, but still has a long way to go.
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IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are
not intended to provide specific advice or recommendations for any individual.
To determine which investment(s) may be appropriate for you, consult your
financial advisor prior to investing. All performance reference is historical
and is no guarantee of future results. All indices are unmanaged and cannot be
invested into directly.
The economic
forecasts set forth in the presentation may not develop as predicted and there
can be no guarantee that strategies promoted will be successful.
Stock investing
involves risk including loss of principal.
The Federal Open
Market Committee (FOMC), a committee within the Federal Reserve System, is
charged under the United States law with overseeing the nation’s open market
operations (i.e., the Fed’s buying and selling of United States Treasure
securities).
The Federal Open
Market Committee action known as Operation Twist began in 1961. The intent was
to flatten the yield curve in order to promote capital inflows and strengthen
the dollar. The Fed utilized open market operations to shorten the maturity of
public debt in the open market. The action has subsequently been reexamined in
isolation and found to have been more effective than originally thought. As a
result of this reappraisal, similar action has been suggested as an alternative
to quantitative easing by central banks.
This research
material has been prepared by LPL Financial.
To the extent you are
receiving investment advice from a separately registered independent investment
advisor, please note that LPL Financial is not an affiliate of and makes no
representation with respect to such entity.
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