Summary of Economic Outlooks: Emerging Economies Lead the Way
Almost non-existent trading volumes continue to remind us of the 2pm bond market close that can't come soon enough on this last day of the year. This leaves those of us who are here in body but not in spirit to occupy our time by producing something useful before the books officially close on 2010. So from that perspective I was surfing and found this recap of economic outlooks for 2011 from a few of the major banks. Jeremy Gaunt at Thomson Reuters compiled this info. Enjoy...
HSBC - A misfiring growth engine
"The global economy looks a whole lot happier than it did six months ago. Fears of a double-dip have faded. At the start of 2011, we are raising our growth forecasts (again). For the world as a whole, we expect growth of 3.3 percent. Once again, the emerging world is setting the pace, with growth of 6.4 percent compared with a much more modest 2.3 percent for the developed world.
"Nevertheless, there are one or two highlights within the developed world, most obviously a big upgrade to our numbers for the U.S., helped along by the recently-announced tax changes for 2011 and 2012.
"While this cyclical news is mostly encouraging, the structural position is a lot more disturbing. Most Western economies are still a long way short of the paths they had been on before the crisis began so, although growth is picking up, the pace of recovery is still disappointingly weak: the high rate of U.S. unemployment simply emphasises the point.
"The lacklustre nature of the recovery is all the more remarkable given the scale of the policy stimulus on offer. Yet there is an obvious explanation: Western nations are suffering from a toxic mixture of high debts and, by past standards, low incomes.
The implied de-leveraging simply reduces the effectiveness of standard macroeconomic policy. This is leading to strains in the financial `engine room' of Western growth."
SOCIETE GENERALE - Good bad or ugly rebalancing?
"We have made only modest revisions to our 2011 outlook, and our overall scenario of a stuttering recovery remains on track.
"Cash rich companies have money to hire and invest but remain cautious.
"Inflationary pressure (is) in several emerging economies -- but still large output gaps entail low inflationary pressures in the developed economies.
"BoJ and Fed easing further through QE and ECB exit delayed. Monetary policy exit will continue in emerging and commodity producers. Dynamic emerging Asia to opt for currency appreciation as part of the policy mix."
GOLDMAN SACHS - Room to grow
"We expect real global GDP to rise 4.6 percent in 2011 and 4.8 percent in 2012, implying three consecutive years of above-trend global growth. This places us well above the consensus of 4.1 percent for 2011 and probably for 2012 as well (there is no consensus yet).
"Despite our relative optimism on global GDP, we are broadly in line with consensus on inflation. This combination of strong growth and moderate inflation reflects our view that there remains significant spare capacity at a global level.
"However, there is considerable cross-country variation in this regard, with large output gaps in most advanced economies offset by increasing capacity constraints in some EM economies. While we are below consensus on inflation in developed economies, we are above for most emerging markets.
"While our central (global) scenario is a positive one, there are some clear downside risks -- with the most important of these stemming from post-crisis fiscal overhang, particularly in Europe. And policy risk could continue to make the environment for risk-taking and entry of trades more difficult than usual."
UBS - De-leveraging won't abate soon.
"The world economy remains broadly on track for recovery. After growing an estimated 4.1 percent in 2010, global growth is expected to moderate to a 3.7 percent pace in 2011 and 3.8 percent in 2012.
"Among developed economies, Japan is expected to slow the most, with growth halving from 3.5 percent this year to 1.4 percent in 2011.
"But some softening is also likely in emerging economies, where growth is expected to decelerate from 6.2 percent in 2010 to 5.6 percent next year before stabilising at 5.7 percent in 2012.
"The lingering constraints of the credit crisis and balance sheet repair, combined with a less-pronounced inventory contribution, suggest that the world economy is unlikely to reduce much of the spare capacity built up during the recession.
"As a result, slack in labour and product markets should only gradually recede, pointing to continued disinflationary forces in broad areas of the world economy."
BANK OF AMERICA-MERRILL LYNCH - Bridging the Global Gap
"The key driver of many of the economic, policy and market stories in 2011 is the yawning gap between the 'advanced' and 'emerging' economies. Specifically, we expect a huge gap in economic fundamentals will continue to create other gaps.
"While economic fundamentals are positive in most emerging markets, banking and real estate crises have created deep and persistent output gaps in the Big Three -- the U.S., Japan and Europe.
"We expect trend-like growth in most economies in the year ahead. Such growth is essential to avoiding overheating in the emerging markets, but it means a very slow healing process in the Big Three.
"This gap means a big divergence in inflation trends, with pockets of inflationary pressure in the emerging markets, and either actual (Japan) or serious risk of (U.S. and the euro zone) deflation in the big three economies.
"The gap also means an ongoing policy split, with super-easy monetary policy and large budget deficits in the Big Three, even as emerging economies keep budget deficits under control and tentatively hike interest rates.
"The fundamentals divide and the policy response imply continued strong capital flows into emerging markets and a risk that bubbles emerge in some markets, even as others remain deeply impaired.
"While our baseline forecast is 'muddle through,' the chronically unbalanced global economy creates a number of risks, including commodity and asset market bubbles, premature policy exit, and trade and currency tensions."
STANDARD CHARTERED - Multi-speed recovery
"The fundamentals vary considerably across the globe, and this is expected to continue in 2011. While the underlying trend is a global recovery, it varies considerably in scale. We see the world economy growing further in size, from $62.3 trillion in 2010 to $64.7 trillion in 2011.
"The size of global GDP is already back to pre-recession levels and is likely to grow further. Global trade has also recovered, and should continue to do so. After growth of 3.7 percent this year, we see the world economy growing 2.9 percent in 2011 and 3.4 percent in 2012.
"Sometimes people talk about the glass being half-full or half empty. In terms of the world economy, our view is that the glass is two-thirds full.
"But in 2011, much attention will be on the one-third of the glass that is empty, namely the West. During 2010, the emerging economies, which represent one-third of global GDP, accounted for more than two-thirds of its growth. This should be repeated in 2011.
"We foresee a sluggish Western recovery alongside growth in the East that might be slower than in 2010, but which is solid and sustainable.
"Domestic demand is the key economic variable to focus on."
DEUTSCHE BANK - Two-track recovery
"The global economy has bounced back to modestly above-trend growth in 2010 and we project it to grow at a trend-like rate of near 4 percent in 2011 and slightly faster in 2012.
"This overall pattern combines two very different pictures: one for economies that have been hit hard by the effects of deflating real estate bubbles and sovereign debt crises and a second for those that suffered more modestly and indirectly from spillovers as global activity declined.
"The first group, primarily the U.S. and much of Europe, suffered a huge drop in output relative to trend and is likely to struggle to close large output gaps slowly over time. The second group, primarily emerging markets, showed only a modest decline relative to previous trend paths and should move above trend in the period ahead.
"Global inflation has already rebounded from recession induced lows. We expect it to pick up modestly but remain at or below target in the U.S., Europe, and Japan, and to remain elevated at 6 percent or more in emerging markets on average.
"Two key risks are the potential for a widened sovereign debt crisis in Europe if further measures are not taken to quell current market stress, and a widening inflation problem in EMs, especially Asia, if greater monetary restraint is not imposed."
BARCLAYS - Pause over, global expansion solid
"The combination of sustained economic recovery and easier monetary policies presents an unusually favourable environment for risky assets.
"Our primary recommendation is to be long equities in both developed and developing markets.... The environment is also favourable for commodities and credit, although absolute credit returns will likely be compromised by generally higher interest rates. We would continue to minimise exposure to (government) bonds.
"Despite our embrace of the 'reflation' trade we believe that a considerable degree of caution is in order.... Our recommendations are made with a 3-month rather than 12-month horizon.
"Sovereign debt problems are far from being resolved.... But while the European debt crisis will probably continue to generate volatility, it is not likely to be the trigger that ends the recovery in economic growth and financial markets."
MORGAN STANLEY - The Three Rs.
"Rebalancing: Further progress from the unbalanced pre-crisis global economy to a more balanced one is a pre-requisite for making this recovery sustainable over the next several years. Encouragingly, we see external imbalances shrinking as many surplus countries transition from export-led to consumption-led growth and many deficit countries move in the opposite direction.
"Reflation: During the rebalancing process, the G3 central banks will likely keep policy very expansionary, which should support the ongoing reflation of the global economy and financial markets. Many emerging market central banks will likely raise rates, but won't be overly aggressive ...
"Reconciliation: Debt-laden governments are facing the huge challenge of reconciling conflicting claims by their bondholders and stakeholders (citizens) on their limited resources. Which choices governments will be making between the various options -- default, engineering strong growth, fiscal austerity, monetisation and/or forcing lenders to fund them at low interest rates -- should be key for economic and market outcomes in 2011 and beyond. We continue to think that a spreading of the sovereign debt crisis constitutes the main downside risk to our otherwise constructive global outlook."
NOMURA - Emerging economies thrive, developed advance.
"We forecast global growth of 4.3 percent in 2011. Emerging economies are set to keep growing strongly but risk overheating while the developed world recovery faces ... stiff headwinds.
"The (U.S.) recovery from the "Great Recession" is likely to remain a slow and arduous climb. We forecast growth to remain below its underlying potential for most of the coming year.
"We forecast the (euro zone) recovery to become more evenly driven by domestic and external demand. Cross-country divergences look set to widen further in 2011, complicating the ECB's (European Central Bank's) exit path.
"Growth in (UK) net exports and investment will likely offset the fall in public spending and the impaired growth in private consumption. Inflation is stubbornly high but policy is on hold for now.
"The Japanese economy has slowed sharply. However, we expect it to avoid a full-blown recession.
"Asia's economies are rebalancing, but unless macro policies also rebalance, setbacks are likely. We expect (Latin America) to begin 2011 with a surge in commodity-driven inflation. Fears of further currency appreciation will likely result in a slow policy response, leading to higher inflation."
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A few things should be very clear after reading these recaps...
A U.S. led global recovery is MIA! Emerging economies are expected to carry the baton of expansion in 2011. Thus, inflationary pressures will come from outside the U.S. and domestic resources will remain underutilized (aka higher structural unemployment). Uncertainty surrounding the effectiveness of macroeconomic policies is unusually high. And investors are extremely nervous about chasing false starts.
Welcome to the age of globalization. America is for sale and we haven't deleveraged fast enough to invest in ourselves.
An excerpt from "Rationalizing the Spike in Mortgage Rates with No Rationality At All"
Lots of explanations out there. Not much of a consensus on the actual cause of this mess though. Everybody seems to be grinding a different axe or taking another angle.
Onlookers attempt to rationalize but always end up wrapped in a web of conflicting conclusions. Me included. We have so much on our plate. How could anyone make sense of it all?
Tax cut extensions. QEII. Inflation. Deflation. Reflation. Disinflation. Weak dollars. Strong exports. More Jobs. Strong dollars. Weak exports.Fewer Jobs. Investments in productivity. Faster factories. Fewer Jobs! Super high savings rate. Seasonal spending sprees. Temporary hiring? Long term unemployed!?Lazy labor force. Lower wage rate. Private payrolls growth. WAGE RATE GROWTH. Aggregate demand. Foreign investor demand. European states. State and local governments. Budget Deficits. Credit Ratings..............currency crisis.....NORTH KOREA...IRAN....CHINA......2012. BOOM.
I didn't even mention housing or financial reform or the assorted entitlements that may or may not lead to the downfall of the greatest country in the world.
And Then. To make matters worse. This is all being digested in a trading environment that is primed for price volatility. Allowing for an easy misinterpretation of the market's exaggerated momentum which in the process has drawn more onlookers who are attempting to explain which leads to more ambiguity which takes us full circle on what I am calling the "UNCERTAINTY PREMIUM". <---There it is. The root cause under the recent spike in rates.
ALSO GOOD READING: Fed Sees Lagging Labor Market Recovery. Cuts Inflation Forecast ...