Global growth

[Consigliere]

Falling beneath the threshold

THE first two weeks of 2012 have been less newsy than the first fortnight of 2011. The impression of growing stress across much of the world economy is nonetheless inescapable. Trouble is brewing. It's been brewing; it's spilling over the brewpot, for god's sake won't someone stop this damned brewing.

The World Bank provides a big picture take on the shaky world economy today, with the release of its Global Economic Prospects report. Global growth is expected to slow slightly in 2012, and the euro-zone economy is forecast to shrink 0.3% for the year. The chart at right gives a sense of how much darker the global picture has grown over the past 7 months. The outlook for the euro zone has deteriorated most rapidly, but diminishing optimism is quite widespread.
It's quite difficult to read the World Bank report and not conclude that more downward revisions of expectations are likely to occur. It's chock full of looming risks. The euro area is obviously the point of greatest concern, but other regions are vulnerable and may succumb to crisis pressure. Many emerging markets, the report notes, have less fiscal room to battle a slowdown than was true in 2007. Many will also need to finance plenty of their own debt this year, and could find themselves in significant trouble if ongoing euro problems suck more capital back to the continent.
The authors of the report game out two potential downside scenarios to the baseline forecast. One, a "small contained crisis", projects the impact of a serious credit squeeze on one or two small euro-area economies, resulting in a decline in their output similar to that already experienced in Greece. In that case, the world economy would grow by 1.7 percentage points less than forecast, for a net expansion of just 0.8%. In the other case, the credit squeeze impacts two larger euro economies (like, oh, Spain and Italy). In that event, the World Bank says, the euro-zone economy is likely to contract by nearly 6% in 2012, and the world economy will fall back into recession.
During the previous global recession, in 2009, emerging market growth, in China especially, helped prevent a far bigger worldwide collapse. At first blush, that would seem to be a cheery possibility this time around, as well. Just yesterday, after all, China reported year-on-year economic growth in the fourth quarter of 2011 of 8.9%, a bit above market expectations. Most economists expect the slowdown to continue, however, and there are some fears that growth might fall to uncomfortably low levels. The air is coming out of China's housing boom, and a slowdown in construction will knock a healthy chunk off of GDP:
“If they build the same amount (in 2012) that they did last year, which is still a phenomenal rate of construction, then it would take GDP down to 6.6 percent,” said Patrick Chovanec, an economist who teaches at Tsinghua University’s School of Economics and Management in Beijing.
That would be a dramatic slowdown from 2011′s 9.2 percent growth, and it doesn’t even include potential indirect impacts that typically come with a housing slowdown, such as falling demand for building materials or a rise in banks’ bad debts.
Having fired up the investment engine in 2008 to combat the sharp decline in its export markets, China might be unwilling or unable to provide sufficient fiscal stimulus in the event of further global weakening. Monetary stimulus will be forthcoming, but it remains to be seen whether consumers will respond (or will be able to respond) appropriately. The timing of the global slowdown is tricky. China is expected to undergo a broad change in top leadership this year, even as its economy slows to the threshold rate considered safe for social stability. Chinese economist Yu Yongding reiterated this week that growth below 7% would signal economic or political crisis (or both).
Perhaps unsurprisingly, the IMF is seeking to boost its resources and is rumoured to be looking for an additional $500 billiont to $1 trillion in capital. The hope seems to be that if sufficient ammunition is arrayed against the markets, then they'll cease to express their lack of confidence in a successful resolution of the euro-zone crisis. Certainly, markets have been remarkably quiescent in recent weeks under assault from a barrage of ECB liquidity. There are near-limitless opportunities ahead, however, for the euro zone to demonstrate once again that trouble is beyond its management, beginning with a Greek crisis that is once more flaring up. And Europe rarely fails to disappoint.

Source: www.economist.com