Global Economic Outlook 2Q12 - BBVA Research
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Global recovery, but heightened risksGlobal Economic Outlook – Second Quarter 2012
Madrid, 8 May 2012
Global Economic Outlook / Second Quarter 2012
Page 2
Global growth will gradually recover in 2012 from the trough in 2011Q4. It will be between 3,5% and 4% in 2012 and 2013.
Risks to the global growth outlook are strongly tilted to the downside as the European crisis continues.
There have been some advances to solve the European crisis, but crucial steps are still pending: a more credible sovereign firewall, a roadmap to a fiscal union and a pro-growth agenda.
Emerging economies are on track for a soft landing. They will contribute about 80% of global growth in 2012 and 2013.
Main messages1
2
3
Global growth (%)Fuente: BBVA Research
4
2.8
-0.6
5.1
3.93.6
4.0
-2
-1
0
1
2
3
4
5
6
2008 2009 2010 2011 (f) 2012 (f) 2013 (f)
Adv. Economies Emerging Economies
Baseline Feb-12 Baseline May-12
Global Economic Outlook / Second Quarter 2012
Page 3
1 The global economy will recover gradually in 2012
2 The European crisis is still the main global risk
3 Recession in Europe, with high heterogeneity
4 Oil prices are a moderate global risk
5 Forecast revision
Contents
Global Economic Outlook / Second Quarter 2012
Page 4
Global economy trough in 2011Q4The global trough is likely to be behind us, although global growth will still be below trend and downside risks remain.
Global GDP growth (%qoq at annual rates)Source: BBVA Research and Haver Analytics
Wider growth divergence betweenUS and Japan vs Europe
Wider growth divergence betweenUS and Japan vs Europe
Emerging economies continue growing faster than advanced economies
Emerging economies continue growing faster than advanced economies
Moderate global growth going forwardModerate global growth going forward
-3
-2
-1
0
1
2
3
08 09 10 11 12 13
World Developed Emerging
Global Economic Outlook / Second Quarter 2012
Page 5
The rebound in Q1 is most evident in business confidenceThe rebound of global activity is most evident in Asia.The recovery, however, is trapped in a modest range, with the US at the better end, the Euro area at the weaker end, and emerging markets somewhere in the middle.
Industrial production (%qoq of 3-month moving avg)Source: BBVA Research , CPB and national sources
Business expectations (PMI)Source: BBVA Research and Bloomberg
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12
US Asia Euro Zone Latin America Global
30
35
40
45
50
55
60
65
Oct 08 Apr 09 Oct 09 Apr 10 Oct 10 Apr 11 Oct 11 Apr 12
USA China EuroZone Brazil Global
Global Economic Outlook / Second Quarter 2012
Page 6
US: ongoing but fragile recovery…Recent data suggest that growth will be resilient in 2012, but will be limited by the ongoing deleveraging. The declining trend in the unemployment rat in the context of moderate growth (below previous recoveries) represents not very positive news: it reflects the exit from the labor force of a large part of working-age population.
US: Unemployment rateSource: BBVA Research and Haver
US: GDP Growth (%yoy)Source: BBVA Research
4
5
6
7
8
9
10
11
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
-6
-4
-2
0
2
4
6
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
Global Economic Outlook / Second Quarter 2012
Page 7
…and fiscal policy represents one of the main risks ro growth in 2013.Monetary policy is burdened with most of the task of supporting private sector demand. But fiscal policy and structural reforms should take up the job in the medium term.
The recovery reduces the probability of an additional quantitative easing (QE3)
The recovery reduces the probability of an additional quantitative easing (QE3)
Interest rates will be kept lowfor an extended period
Interest rates will be kept lowfor an extended period
Nevertheless, further quantitative easing would be implemented rapidly
in case the outlook deteriorates
Nevertheless, further quantitative easing would be implemented rapidly
in case the outlook deteriorates
Monetary policy
If there are no new measures, there will be a sharp fiscal tightening at the end of 2012.
It could induce a recession in 2013.
If there are no new measures, there will be a sharp fiscal tightening at the end of 2012.
It could induce a recession in 2013.
Even with the electoral uncertainty, we expect a gradual fiscal consolidation ,
with slight negative effect on growth in 2013.
Even with the electoral uncertainty, we expect a gradual fiscal consolidation ,
with slight negative effect on growth in 2013.
The main problem is the lack of progress to tackle long-run fiscal consolidation
The main problem is the lack of progress to tackle long-run fiscal consolidation
Fiscal Policy
Global Economic Outlook / Second Quarter 2012
Page 8
China is on track to a soft landing Despite sharper-than-expected slowdown in Q1 (8.1% vs 8.9% in Q4) growth momentum should have
bottomed and will rebound on policy support (monetary policy and fiscal stimulus).Recent reduction in GDP growth target for 2012 (from 8% to 7.5%) is not particularly significant
because: (i) it was anticipated in the five-year plan published in 2011; (ii) 7,5% is more a floor than a target;
China: GDP growth targets and outturnsSource: BBVA Research and CEIC
-5
0
5
10
15
-5
0
5
10
15
2007 2008 2009 2010 2011 2012 2013
Consumption Investment Net Exports GDP growth
China: quarterly growth (%yoy)Source: BBVA Research and CEIC
0
2
4
6
8
10
12
14
1991-1995 1996-2000 2001-2005 2006-2010 2011-2015 (f)
Target Outturn
Global Economic Outlook / Second Quarter 2012
Page 9
Latin America converges to its potential growth rateGrowth in Latin America is also proving resilient, especially due to the strength of its domestic demand.
Growth projections for the region remain mostly unchanged relative to February, around 4% for the next years.
Even with some reduction in inflation, it will remain similar to 2011 levels. Except for Brazil, this will limit a reduction in official interest rates, contrary to big Asian countries (China and India).
Latam 6: ARG, BRA, COL, CHI, PER, VEN.
Latam: GDP Growth (%)Source: BBVA Research
Inflation in Emerging Economies (% annual average)Source: BBVA Research
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
2011
2012
2013
Latam Emerging Asia exChina China
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
2010 2011 2012 2013 2014 2015 2016
Forecasts Feb 2012
Forecasts May 2012
Global Economic Outlook / Second Quarter 2012
Page 10
1 The global economy will recover gradually in 2012
2 The European crisis is still the main global risk
3 Recession in Europe, with high heterogeneity
4 Oil prices are a moderate global risk
5 Forecast revision
Contents
Global Economic Outlook / Second Quarter 2012
Page 11
European crisis: some timid advances, but there are important pending issues
Greek PSI implementedGreek PSI implemented
Fiscal compact is approvedFiscal compact is approved
ECB long-term liquidity supportECB long-term liquidity support
Advances
Credible liquidity firewallCredible liquidity firewall
Further advances towards a fiscal unionFurther advances towards a fiscal union
Pending issues
1
2
3 Pro-growth agendaPro-growth agenda
Persistent complacency in Europe results in muddling through the crisis, always behind the curve on what is needed
Persistent complacency in Europe results in muddling through the crisis, always behind the curve on what is needed
Global Economic Outlook / Second Quarter 2012
Page 12
Greece: Solvency concerns still linger.Greece and Portugal: public debt projectionsSource: BBVA Research and IMF
Greece• Many downside risks remain, threatening debt
reduction path:
• Elections on 6 May, splintered congress
• Hard road for further reforms, close monitoring by the troika
• Recession to continue
• New Greek bonds already under pressure
Portugal• Fiscal adjustment and reforms are on track
• External imbalance is closing
• Yet this will not be enough to access markets in 2013Q3.
• Our central scenario: second bailout and no restructuring
1
Global Economic Outlook / Second Quarter 2012
Page 13
Sovereign liquidity firewall (EFSF/ESM) not enough to reassure markets
ESM/EFSF resources and gross financial needs in Spain and Italy (long-term debt and deficit)Source: BBVA Research and IBloomberg
ESM agreement 30 March
1
New available lending capacity: 500 bn EUR(apart from 200 bn EUR already committed by
EFSF)
New available lending capacity: 500 bn EUR(apart from 200 bn EUR already committed by
EFSF)
EFSF may continue lending until mid-2013 to cover the slow process of capitalizing the ESMEFSF may continue lending until mid-2013 to
cover the slow process of capitalizing the ESM
It is not enough to reassure markets, given financing needs in Spain and Italy
It is not enough to reassure markets, given financing needs in Spain and Italy
Increase in IMF Resources (330 bn EUR) will not necessarily be lent to Europe
Increase in IMF Resources (330 bn EUR) will not necessarily be lent to Europe
But …ESM lending
capacity
EFSF committed
funds
Spain
Italy
0
100
200
300
400
500
600
700
800
Firewall Spain & Italy gross financing needs
2012Q2-2013Q4
Spain & Italy gross financing needs
2012Q2-2013Q4
Global Economic Outlook / Second Quarter 2012
Page 14
Fiscal compact is agreed, but still waiting for a roadmap for Europe
Fiscal compact
2
Relatively lax: transitory deviations from structural deficit rule permitted under
“exceptional circumstances”.
Relatively lax: transitory deviations from structural deficit rule permitted under
“exceptional circumstances”.
Risk of it being ineffective to contain deficits in the long-run
Risk of it being ineffective to contain deficits in the long-run
May be seen as not strong enough to justify a more forceful and decisive action by hardliners
at the ECB or core Europe
May be seen as not strong enough to justify a more forceful and decisive action by hardliners
at the ECB or core Europe
Eurobonds: convenient as an insurance mechanism
Eurobonds: convenient as an insurance mechanism
Proposal of “blue” and “red” bonds has the advantage of maintaining market disciplineProposal of “blue” and “red” bonds has the
advantage of maintaining market discipline
Still pending: a roadmap to a fiscal union
Not necessarily a union with fiscal transfers Not necessarily a union with fiscal transfers
• Fiscal compact commits governments to establish a fiscal rule at constitutional level, limiting structural budget deficits to 0,5% of GDP.
• Includes reverse majority rule needed to prevent sanctions of about 0.1% of GDP for deviations• Still, no talk of a roadmap to a fiscal union.
Global Economic Outlook / Second Quarter 2012
Page 15
Provision of long-term liquidity by the ECB calmed markets temporarily…3
10y sovereign spread vs. Germany (bps)Source: Bloomberg and BBVA Research
Liquidity risk on European banks eased during the first quarter …
Liquidity risk on European banks eased during the first quarter …
… and funding markets were opening up cautiously, helping to reduce sovereign spreads,
… and funding markets were opening up cautiously, helping to reduce sovereign spreads,
but these effects have been short-lived. Recent doubts on Spain have increased tensions
but these effects have been short-lived. Recent doubts on Spain have increased tensions
In any case, the ECB can only serve as a bridge to the long run, which depends on structural
reforms and a growth agenda
In any case, the ECB can only serve as a bridge to the long run, which depends on structural
reforms and a growth agenda0
200
400
600
800
Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12
Ireland Spain ItalyBelgium France NetherlandsAustria
Global Economic Outlook / Second Quarter 2012
Page 16
… but it has also increased the exposure of banks to the sovereign3
Banks: Holdings of euro area government debt over total assets (%)Source: ECB and BBVA Research
Indirect intervention of the ECB in sovereign bond markets through banks
Indirect intervention of the ECB in sovereign bond markets through banks
Increased exposure of banks to the sovereign increase potential negative feedback effects
Increased exposure of banks to the sovereign increase potential negative feedback effects
Reinforces the need for a definitive solution to doubts about sovereign solvency and the provision of sovereign liquidity support
Reinforces the need for a definitive solution to doubts about sovereign solvency and the provision of sovereign liquidity support
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12
Spain Italy
Global Economic Outlook / Second Quarter 2012
Page 17
CrisisCrisis
Why?Why?
Solution:
eliminate tail risk scenarios
Solution:
eliminate tail risk scenarios
It is worrisome that the tensions came back so soon after: (i) the ECB’s two LTRO ; (ii) the structural reforms is Spain and Italy, and (iii) the European Council
advances in the fiscal compact and the ESM
It is worrisome that the tensions came back so soon after: (i) the ECB’s two LTRO ; (ii) the structural reforms is Spain and Italy, and (iii) the European Council
advances in the fiscal compact and the ESM
Risk of negative feedback between fiscal austerity and recessionRisk of sovereign debt a restructuring and ESM seniority
Risk of negative feedback between fiscal austerity and recessionRisk of sovereign debt a restructuring and ESM seniority
Roadmap to fiscal integrationRoadmap to fiscal integration
Fiscal consolidation needs to be gradual and multiyear, with explicit targets. Focus on structural deficits
Fiscal consolidation needs to be gradual and multiyear, with explicit targets. Focus on structural deficits
We should not rely only on austerity measures. But rather on structural reforms in exchange of a growth strategy
We should not rely only on austerity measures. But rather on structural reforms in exchange of a growth strategy
Re-launch European investment in infrastructureRe-launch European investment in infrastructure
A deepening European crisis is still the main risk to the global economy
Global Economic Outlook / Second Quarter 2012
Page 18
1 The global economy will recover gradually in 2012
2 The European crisis is still the main global risk
3 Recession in Europe, with high heterogeneity
4 Oil prices are a moderate global risk
5 Forecast revision
Contents
Global Economic Outlook / Second Quarter 2012
Page 19
As the short-run effect of long-term liquidity provided by the ECB fades, financial stress has resurfaced, especially in peripheral Europe.
Financial stress in Europe continues to be very high…
BBVA Financial Stress IndexSource: BBVA Research
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12
US EMU
Global Economic Outlook / Second Quarter 2012
Page 20
Europe faces a mild recession in 2012, with wide heterogeneity and high risks In the baseline scenario we assume that European authorities will continue to take decisive measures that will gradually lower financial tensions. Nonetheless, risks to the outlook are strongly tilted to the downside. Growth in Europe will be slow relative to other advanced economies such as the US, and very heterogeneous among EMU countries. Peripheral economies will be the most affected by financial tensions and fiscal consolidation plans.
GDP growth in EMU countriesSource: BBVA Research
GDP growth in US and EMU (%yoy)Source BBVA Research
-0.2
0.90.7
1.6
0.5
1.1
-1.5
0.1
-1.3
0.6
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2012
2013
2012
2013
2012
2013
2012
2013
2012
2013
EMU Germany France Italy Spain
Forecast in May-12
Forecast in Feb-12
-6
-4
-2
0
2
4
200 200 2010 2011 2012 2013
US GDP growth (%, yoy) EMU GDP growth (%, yoy)
8 9
Global Economic Outlook / Second Quarter 2012
Page 21
1 The global economy will recover gradually in 2012
2 The European crisis is still the main global risk
3 Recession in Europe, with high heterogeneity
4 Oil prices are a moderate global risk
5 Forecast revision
Contents
Global Economic Outlook / Second Quarter 2012
Page 22
The increase in oil prices represents a moderate risk to global growth
Oil prices in real terms (dollars of 2010)Source: BBVA Research and Haver
Part of the increase in oil prices is the result of tight supply and demand
Part of the increase in oil prices is the result of tight supply and demand
Geopolitical risk premium between 10-15 USD per barrel. Persistent throughout 2012.
Geopolitical risk premium between 10-15 USD per barrel. Persistent throughout 2012.
Very limited impact on growth given scant tightening reaction by central banks
Very limited impact on growth given scant tightening reaction by central banks
In case of a stronger price spike growth could be affected due to
the consequent increase in global risk aversion
In case of a stronger price spike growth could be affected due to
the consequent increase in global risk aversion0
20
40
60
80
100
120
140
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Brent oil in 2010 dollars
Log trend real prices (8% annual)
Global Economic Outlook / Second Quarter 2012
Page 23
1 The global economy will recover gradually in 2012
2 The European crisis is still the main global risk
3 Recession in Europe, with high heterogeneity
4 Oil prices are a moderate global risk
5 Forecast revision
Contents
Global Economic Outlook / Second Quarter 2012
Page 24
All in all: Growth heterogeneity among main economic areas Growth projections remain mostly unchanged relative to the February Global Economic Outlook. Growth will continue to be very heterogeneous between Europe, US and emerging countries. All in all, risks to the projections are strongly tilted to the downside due to the European crisis.
Global growth (%)Source: BBVA Research
3.64.0
1.92.3 2.2
-0.2
0.9
6.0
3.7 3.8
5.26.0
8.38.7
5.7
1.5
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
2012
2013
2012
2013
2012
2013
2012
2013
2012
2013
2012
2013
2012
2013
2012
2013
World Developed US EMU Emerging Latam7 Em Asia excChina
China
Forecasts in May-2012Forecasts in Feb-2012
Global Economic Outlook / Second Quarter 2012
Page 25
GDP Growth Forecasts2011 2012 2013
World 3.9 3.6 4.0Developed 1.6 1.5 1.9US 1.7 2.3 2.2
EMU 1.5 ‐0.2 0.9
Spain 0.7 ‐1.3 0.6
Emerging 6.2 5.7 6.0LatAm 7 4.3 3.7 3.8
Mexico 3.9 3.7 3.0
LatAm 6 4.5 3.8 4.1
Brazil 2.7 3.3 4.3
LatAm 5 6.7 4.4 3.9
Argentina 8.8 3.7 3.2
Chile 6.0 4.2 4.7
Colombia 5.9 5.0 5.2
Peru 6.9 6.0 5.7
Venezuela 4.2 3.9 1.9
EAGLES 6.7 5.8 6.4
Turkey 8.5 2.7 5.6
Asia Pacific 5.7 5.7 6.1
Emerging Asia 7.3 6.8 7.4
China 9.2 8.3 8.7
Emerging Asia ex China 5.4 5.2 6.0
Global recovery, but heightened risksGlobal Economic Outlook – Second Quarter 2012
Madrid, 8 May 2012