Q3 Macro Outlook: 2011 Déjà vu

Although the Asian slowdown has ensured that this year is not an exact replica of last year the similarities are aplenty. Weaker data from the US has seen renewed calls for a recession emerging little by little while the Eurozone is teetering on the brink of recession brought about by cuts in public spending. In the East, China appears to be finally coming back down to earth, meaning lower growth rates, having been seemingly impervious to the rest of the world’s trouble up until now.

US – still muddling through
Data deteriorated during the spring months, which has caused downward revisions to GDP forecasts while recession warnings are slowly re-emerging after last fall’s recession-that-wasn’t. Despite this turn of events we stick to our ‘muddle through’ scenario for 2012: domestic demand looks moderate, investment growth remains robust and even housing seems to have recovered enough for a bottom to have formed.

On the other hand, however, we also expect growth to be curbed by a modestly improving labour market and hence wage growth plus the still on-going deleveraging process. We can see the finishing line now but there is still some way to go, but by some measures related to housing affordability and mortgage debt serviceability Americans are already in a better position than they have been for the last twenty years.

Adding these factors up we do not see a recession in the third quarter though data will likely continue to show a near-stalling economy before a late-year pick up aided by the housing sector.  On the other hand, we do not see room for growth much higher than 2 percent and hence we stick to our forecasts for US GDP, Unemployment Rate and CPI. Put differently, we expect a repeat of last year.

Europe – more debt, more division, more contraction
Eurozone leaders may slowly inch towards a plan for a more integrated union, but the speed is neither fast enough to satisfy bond markets nor avoid another recession. Having barely avoided one in the first quarter – before revisions at least – we project an outright contraction in the second and third quarters before a return to mild growth late in the year, resulting in annual growth of -0.2 percent.

The sweeping reforms in Spain, Italy and Greece will take time to make an impact and until they do the drag on economic growth from public spending cuts will see activity in the Southern part of the Euro bloc decline.

Meanwhile, Germany is struggling due to weaker demand for German produce from trading partners both inside and outside of the Eurozone and a lack of investments due to the uncertain outlook amidst the debt crisis. We do not expect the weakness to materialise into an outright recession, however, but annual growth looks set to be no greater than 1 percent in Germany. Combined we expect the North-South chasm to result in a Eurozone growth contraction while the unemployment rate here looks set to keep rising and average 11.2 percent.

Asia – china’s softish hard landing
The Chinese growth miracle is slowing as waning global trade growth and receding marginal return on domestic investments make their mark. The last five years which, mind you, include a global recession never saw GDP growth dip below 9 percent per year, but as the clouds darken we are set for such an outcome. Chinese authorities themselves lost faith earlier this year in their ability to generate the previously seen high growth rates and lowered their GDP target to 7.5 percent, and we forecast 6.5 percent. Either way the 9 percent level is set to be breached this year. Surely, the government still possesses policy tools to keep GDP high, but the question is whether and on what scale it will use these. Some monetary easing has already taken place as the reserve requirement ratio has been lowered three times since December while the 1-year lending rate was cut mildly in early June to 6.31 percent and again in July to 6.00 percent. Further monetary accommodation can be ramped up and fiscal stimulus can also be applied if necessary. Inflation has decreased all the way to 2.2 percent as of June 2012 from 6.5 percent in mid-2011, which gives the People’s Bank of China more room to manoeuvre. Even this, however, may not be enough to convince the authorities to do more than mild easing of monetary policy. Premier Wen Jiabao has repeatedly commented that China will not go down the same road of massive stimulus that we saw during the global recession.

See the entire Saxo Bank Q3 Outlook report in a PDF version.

See previous Saxo Bank Quarterly Outlooks.