A Less Friendly World: Cutting Our Global Forecasts


We now envisage significantly less growth than before in the US and in Europe

We have flagged for some time that our economic forecasts—in the US in particular—have been under review. The news over the past few weeks has confirmed the softening in the US and seen more weakness in Europe, and we are now making comprehensive revisions to our global growth and asset forecasts. Our individual publications across ECS will contain more of the details but we summarise the main revisions here.

The basic story is that we now envisage significantly less growth than before in the US and in Europe—and as a result less tightening in European monetary policy too. The same is true to a lesser degree in the EM world. Overall, we are lowering our global GDP growth forecasts to 4.0% for 2011 and 4.4% for 2012, from 4.1% and 4.6%. Because of these shifts, our forecasts for global yields and for global equity markets have come down too, although we continue to see commodity prices heading higher.

While our aggregate global growth forecasts still appear relatively healthy, we have made significant downgrades in places, particularly in the US. But we would emphasise that as we look ahead to the next 6-18 months it is easy to imagine worse outcomes and the world economy is fragile to new shocks here. In particular, our current forecasts embed assumptions that the US will avoid falling into outright recession, that the European sovereign crisis now receives a more forceful response from the ECB and that large EM economies will largely be able to adjust policy to cushion against the greater external growth risks. If those conditions are not satisfied, a weaker growth forecast—even after accounting for a larger policy response—would make sense. It is this shift in the balance of risks relative to our baseline view that is reflected in the significant changes to our asset market forecasts, and which the market is in the process of pricing.

As we discuss below, the point of maximum risk is likely to be the next 6-9 months. While we are not forecasting a US recession—nor a renewed round of Fed asset purchases—the probability of both has climbed significantly. We now see a recession as a 1 in 3 chance. That issue is likely to be resolved one way or another by early 2012. The constraints on policy—political and economic—in the face of growth and sovereign pressures are an important variable here.

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Jan Hatzius
Managing Director, Global Investment Research
Dominic Wilson
Managing Director, Global Investment Research