Growth forecasts for the US and euro zone are cut, but it’s still not recession.
AS the world stares at another financial meltdown, economists across the globe are crunching numbers and cutting GDP growth estimates for the world’s biggest economies. While growth estimates for the US and the euro zone have been pruned, Japan is expected to see a V-shaped recovery in the second half of 2011. Despite all the panic in financial markets, economists believe it’s too early to forecast a recession.
This is because growth in the US in first half of 2011 was pushed down by three factors — spiking oil prices, supply disruptions from Japan and bad weather. As these factors dissipate or reverse, growth would return. Following a quarter-on-quarter GDP growth of 1.3 per cent in Q2, Nomura expects 2.5 per cent (previously 3.3 per cent) in Q3 and 3.4 per cent (previously 3.1 per cent) in Q4. For the euro zone, given the fiscal crisis spreading to Spain and Italy, GDP growth forecasts are weaker in the second half than they were in the first half.
However, GDP growth estimates for three of Asia’s largest economies – China, India and Korea – remain unchanged.
“At 7.9 per cent, our overall 2011 GDP growth forecast for Asia (excluding Japan), Australia and New Zealand remains unchanged,” says Nomura. The reason behind this being the robust domestic demand in these economies and the likely benefit that will be accrued through lower commodity prices.
However, for order to return, financial markets need to return to stability. Given the domestic environment is not conducive for investment, capital from the US (which is the primary source of global capital flows) will seek more lucrative growth opportunities outside. According to Goldman Sachs, fiscal austerity resulting from the debt ceiling agreement should result in expectations of weaker-for-longer economic growth in the United States, as reflected in the downward revisions. This should mean lower rates for Treasuries, as well as a less fertile growth environment for domestic US equities.
“In terms of our estimated path for the next 12 months, we feel the relative positioning of EM Asia could result in outperformance over the next three months,” it said.
While this may sound like music to Asian markets, if the US and the euro zone slip into recession, the Asian economies could be hit hard, too. The cascading effect of a even a mild recession would result in many non-linear effects like financial deceleration, job losses caused by weakening exports and flight of capital.
To prevent the wealth effect from being wiped off, policy makers need to find a way to prevent the massive sell-off in the markets.
