Immediate Downturn Dodged, Growth To Falter Again 2012

Keith Wade, chief economist at Schroders, gives his outlook for the world economy 

Global growth almost ground to a halt in the second quarter as activity in the US and Europe faltered whilst Japan remained in recession. Financial markets are extrapolating economic weakness into the second half of the year and beyond. We have cut our global growth forecasts as a result.

Despite market concerns, we are not forecasting a double dip recession. We expect growth to firm in the second half of the year as the disruption from Japan fades and the squeeze on spending from inflation lessens following the decline in commodity prices. The main risk to growth is that companies postpone spending decisions due to a loss of confidence. I our view the pre-conditions for a recession are not in place (in the sense that the private sector has strong cash flow and have little need to sharply retrench). The risk today comes from the public sector which has taken the strain of the financial crisis.

Economic Strategy Viewpoint Aug 2011.doc (620KB)

Fiscal policy will tighten next year according to IMF figures and, along with the on going Euro crisis, will act as a headwind on global growth. Given the lack of credit growth in the post-financial crisis economy, the recovery is less vigorous and more vulnerable to shocks than in past cycles. This suggests that having dodged an immediate downturn, growth is likely to falter again in 2012.

Azad Zangana, European economist gives his view on the eurozone

The politics remains ugly. Greece bail-out version 2.0 was missing lots of details, which raised fears that a final agreement may not be reached. Meanwhile Eurozone politicians have gone on holiday while markets panic.

Along comes the European Central Bank to flood markets with liquidity. However, the sovereign debt crisis compounded with the slowdown in US and European GDP growth ensures risks assets continue to sell off.

Looking ahead, we continue to forecast slow and bumpy growth, though not a recession for the Eurozone as a whole. On the political front, we expect leaders to finalise the Greek bail-out and the upgrade of the European Financial Stability Facility, though we remain some way away from a definitive solution. For now, there is a little more road left for the can to be kicked along, but not much.