The World Economic

Outlook
Sara Johnson,
Senior Research Director, Global Economics
July 16, 2012

The Global Economy: Slow, Uneven Progress

Our forecast continues to incorporate a Greek exit from the monetary union in

mid-2013, which triggers another setback for the Eurozone economy.

US growth will remain sluggish in 2012-13, then pick up in 2014-15.
Chinas export-oriented growth model is reaching its limits and will give way to a

new industrialization strategy.

Emerging markets in Asia, Latin America, and Europe will achieve solid growth.
Risks to the outlook:
Eurozone debt crisis
China hard landing
Iran-related oil price shock
US fiscal cliff in January 2013

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The World Economic Expansion Proceeds with Caution

(Percent change)

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Purchasing Managers Indexes for Manufacturing

Indicate a Global Slowdown
(Index, over 50 indicates expansion)

Sources: Institute for Supply Management, Markit, China Federation of Logistics and Purchasing
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Global Stock Markets: Mixed Results in 2012

(Percent change)

* In US dollars
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Emerging Markets Lead the Global Expansion, But

Have Not Decoupled from the Advanced Countries
(Real GDP, percent change)

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Asia-Pacific Will Achieve the Fastest Real GDP Growth

(Annual percent change)

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Real GDP Growth in the US, Eurozone, and Japan

(Percent change)

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Real GDP Growth in the BRICs: Soft Landings

(Percent change)

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Policy Interest Rates in the Advanced Countries Will

Stay Low for Several Years
(Percent, end of quarter)

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Declining Policy Interest Rates in Emerging Markets

(Percent, end of quarter)

* One-year loan rate

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Industrial Materials Prices Are Volatile

(IHS Global Insight Indexes, 2002:1=1.0)

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The Outlook for Brent Crude Oil Prices

(US dollars per barrel)

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Global Consumer Price Inflation Will Moderate

(Percent change)

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Consumer Price Inflation Varies by Region

(Annual percent
change)

* Excluding Zimbabwe
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Exchange Rates per US Dollar

Canadian Dollar

Euro

(Canadian dollars per US dollar, quarterly averages)

(Euro per US dollar, quarterly averages)

Japanese Yen

Chinese Renminbi

(Yen per US dollar, quarterly averages)

(Yuan per US dollar, quarterly averages)

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16

The US Economy Is Slowly Moving Forward

Consumers and businesses are cautiously increasing their spending.
The Eurozone recession and a stronger dollar will dampen export growth and

increase import competition.

Housing markets will steadily recover, supporting economic growth.

We expect legislation to avert the major fiscal contraction set for January 2013,

but policy uncertainty will discourage risk-taking.

Continuing moderate growth is the most likely outcome.
The Eurozones debt problems, a sharper slowdown in China, and Iran-related oil-

supply disruptions pose downside risks. We have raised the probability of a US

recession from 20% to 25%.

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17

US Economic Growth and the Unemployment Rate

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US Economic Growth by Sector

(Percent change)
2011

2012

2013

2014

Real GDP

1.7

2.0

2.0

2.7

Consumption

2.2

2.0

2.3

2.1

-1.3

11.3

12.4

17.5

8.8

6.2

5.0

7.5

Federal Government

-1.9

-2.7

-3.0

-2.8

State & Local Government

-2.2

-2.1

-0.9

0.0

Exports

6.7

3.2

4.5

5.9

Imports

4.9

2.5

4.1

3.7

Residential Investment
Business Fixed Investment

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North American Business Cycles Are Synchronized

(Real GDP, percent change)

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Canadas Economic Growth Hits a Soft Patch

A sluggish US economy will limit Canadas near-term growth.
Record levels of household debt will restrain growth in consumer spending.
Housing starts are expected to retreat from current above-trend levels.
Canada will rely increasingly on commodity exports to emerging markets.
Relatively high oil prices support investment in the oil sands, but US delays in

approving the Keystone XL pipeline could hurt future production growth.

The Canadian dollar will stay below parity with the US dollar.
Western provinces will lead growth; Atlantic provinces will lag.

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Canada Outlook Summary

Real GDP Growth (%)

Consumer Price Inflation (%)

Exchange Rate per USD*

Current-Account Balance**

*Annual average, **Billions of US dollars

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Mexicos Economy Faces Headwinds

Mexicos economy is closely linked to the US economy through trade, capital

flows, and remittances.

Sluggish growth in the US economy limits Mexicos near-term growth prospects.
A weak peso will help to improve international cost competitiveness.

Automotive and aerospace industries are expanding production in Mexico.

Declining oil production will weaken government finances.
The new PRI-led governments platform includes broadening the value-added

tax base, reforming labor markets, and opening the oil and gas industry to
private investment.

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Mexico Outlook Summary

Real GDP Growth (%)

Consumer Price Inflation (%)

Exchange Rate per USD*

Current-Account Balance**

*Annual average, **Billions of US dollars

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Investment Policies Shape Growth in South America

Most countries have sound macroeconomic fundamentals, improving debt profiles,

substantial foreign-exchange reserves, and stable financial systems.

High commodity prices and trade with Asia have supported growth. The regions

growth is slowing in 2012 as exports decelerate.

Long-term prospects are bright for countries attracting foreign investment,

including Brazil, Chile, Colombia, and Peru.

Policy mismanagement and resource nationalism will have consequences in

Venezuela, Argentina, Bolivia, and Ecuador.

Long-term challenges include inadequate infrastructure, restrictive business

environments, and income inequality.

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Real GDP Growth in South America

(Annual percent change)

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Brazils Growth Remains Disappointing in 2012-13

Brazils economy decelerated sharply in 2011, as high interest rates and a strong

currency undermined industrial growth.

Growth remains weak in 2012, as gains in services are offset by declines in

industrial and agricultural production.

While investment has declined, consumer spending has continued to post solid

growth, supported by rising employment and incomes.

Continued monetary easing will help to revive growth.
Strong inflows of foreign capital will support investment in the medium term.

Brazil will become Latin Americas top oil producer in 2014.

High and complex taxation, heavy bureaucracy, and insufficient infrastructure

investment continue to impede competitiveness.

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Brazil Outlook Summary

Real GDP Growth (%)

Consumer Price Inflation (%)

Exchange Rate per USD*

Current-Account Balance**

*Annual average, **Billions of US dollars

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Eurozone Confidence Is Weakening

(Positive replies minus negative replies as percent of total)

Source: European Commission

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Greece Is Expected to Leave the Eurozone in Mid-2013

New Democracys victory in the June 17 election will provide only a brief respite

for markets. It is unlikely that Greece will be able to implement the reforms
needed for long-term survival in the Eurozone.
Greece will continue to miss its fiscal and reform targets, as the economy remains

trapped in a depressionary environment.

At some point, the troika (EU, ECB, and IMF) will cut off financial support for

Greece, effectively closing access to international bond markets.

Faced with the choice of becoming a cash economy or leaving the Eurozone, we

expect that Greece will exit and start printing its own currency.
The run-up to the Greek exit will have adverse repercussions across Europe

rising bond yields in vulnerable countries, tightening credit conditions, euro

depreciation, falling equity values, and reduced consumer and business spending.

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The Eurozones Multi-Dimensional Crisis: Whats Next?

Current Strategies
Fiscal tightening

Sovereign
Debt

Market reforms
Liquidity provision

Next Steps
Recapitalizing Spains banks

Banks

Economy

Growth pact
Greek exit from Eurozone
Banking union
Fiscal union

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A Protracted Eurozone Recession

The sovereign debt crisis, related banking problems, and fiscal austerity will keep

the Eurozone on the edge of recession through 2013.

Northern countries are generally healthier (except Netherlands). Germany is

benefiting from a strong labor market, but export growth will suffer.
Tight fiscal policies and squeezed consumer purchasing power are restraining

growth, especially in southern Europe.

Recessions in Greece, Spain, and Italy will extend into 2014. A Greek exit from

the Eurozone is expected in mid-2013.

Necessary structural reforms to improve competitiveness on the periphery will

encounter resistance and take years to work.

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Real GDP Growth in Western Europe

(Annual percent change)

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Real GDP Growth in Western Europe

(Annual percent change)

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The Euro Will Depreciate in 2012 and 2013

(Dollars per euro, quarterly averages)

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British Sterling Will Recover Against the Euro and Dollar

(Average exchange rate per GBP)

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Emerging Europe Vulnerable to Eurozone Problems

The Eurozones sovereign debt problems are affecting the region through exports,

bank solvency risks, and credit availability.

Several countries are in recession, including Hungary and the Czech Republic.
A drop in oil prices and a weak investment climate will slow Russias growth.

Poland, with its large domestic market, will continue to grow, albeit more slowly.
Turkeys economy overheated in 2011, leading to higher inflation and markedly

slower economic growth in 2012.

Euro adoption schedules will be extended. Other than Croatia, EU candidates will

see little progress toward accession.

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Real GDP Growth in Emerging Europe

(Annual percent change)

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Russia Maintains Lackluster Growth

Leading indicators show industrial output and retail trade decelerating.
Weak global demand has pushed oil prices below the break-even point for the

federal budget (currently $115 per barrel for Urals crude oil).
Inflation reached a post-Soviet low in early 2012, but easing fiscal policies and

increases in food and utility prices are now pushing it back up.
As a result of the Eurozone crisis, non-energy exports have weakened, while

heightened risk aversion has increased capital outflows.

With West European banks concerned about asset quality, Russian entities

(including banks) have found it difficult to borrow abroad.

Medium- and long-term growth is constrained by unfavorable demographics and

massive capital-investment requirements.

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Russia Outlook Summary

Real GDP Growth (%)

Consumer Price Inflation (%)

Exchange Rate per USD*

Current-Account Balance**

*Annual average, **Billions of US dollars

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40

Japans Economy Faces a Slow Recovery

Real GDP increased at a 4.7% annual rate in the first quarter of 2012, led by gains

in private consumption, government spending, and net exports.

A weak labor market and sluggish income growth will limit consumers contribution

to economic growth over the remainder of 2012.

Post-earthquake reconstruction is under way and will support growth in 2012-14.
The Bank of Japan will continue its accommodative policies.
The Eurozone recessions impact will be limited, given that less than 10% of

Japans exports are destined for the European Union.

Mild deflation is expected through 2014.
A declining and aging population limits long-term growth potential.

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Japan Outlook Summary

Real GDP Growth (%)

Consumer Price Inflation (%)

Exchange Rate per USD*

Current-Account Balance**

*Annual average, **Billions of US dollars

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42

Asia Will Continue to Lead Global Growth

Despite slowdowns, most Asian economies continue to post solid growth rates.
Export growth is sluggish in Taiwan, Hong Kong, Singapore, and Malaysia.
With inflationary pressures subsiding, some countries are easing monetary

policies to support growth.

The medium-term outlook for consumer spending remains bright, supported by the

rising incomes of a growing middle class.

Asias emerging markets will continue to increase infrastructure investments.
A China hard landing is the major risk to regional growth.

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Real GDP Growth in Asia-Pacific

(Annual percent change)

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Real GDP Growth in Asia-Pacific

(Annual percent change)

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Chinas Economy Still Headed for a Soft Landing

Chinas real GDP grew 7.6% year-on-year (y/y) in the second quarter, its slowest

pace since early 2009; net exports remained a drag on growth.

Fixed-asset investmentled by infrastructure spendingcontinues to post solid

gains and credit growth is speeding up.

Consumer price inflation subsided to 2.2% y/y in June, allowing an easing of

monetary policies and lower interest rates.

Fiscal policy shifted to stimulation mode in May with approval of investment

projects and various consumer subsidy programs.

The probability of a China hard landingcaused by the bursting of bubbles in real

estate and private financing marketsis about 25%.

Chinas export-oriented growth model has reached its limits; to sustain growth,

China will need to cultivate domestic demand and move up the value chain.

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46

Chinas Expansion Continues at a Slower Pace

(Percent change from a year earlier)

Sources: NBS, China Customs, IHS Global Insight

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47

Chinas Shifting Engines of Growth in the Five-Year Plan

External Demand

Domestic Demand

Coastal China

Inland China

Industrial Sector

Services Sector

Energy-Intensive Sectors

New and High-Tech Sectors*

* Strategic Sectors: Energy conservation and environmental

protection, new-generation information technology, biology,
high-end equipment manufacturing, new energy, new materials,
and new-energy-fueled vehicles
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48

China Outlook Summary

Real GDP Growth (%)

Consumer Price Inflation (%)

Exchange Rate per USD*

Current-Account Balance**

*Annual average, **Billions of US dollars

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49

Indias Slowdown Highlights Need for Market Reforms

Real GDP growth slowed to 5.3% year-on-year in the January-March quarter, the

weakest performance in nine years.

Delays in market reforms are holding back foreign and domestic investment.
A loss of investor confidence and large current-account deficits have sent the

rupee to new lows against the US dollar.

Persistent inflation will limit the extent of further monetary easing.
The governments fiscal 2012-13 budget does little to curtail the fiscal deficit or

improve the operating environment for businesses.

Long-term growth potential remains high, led by information technologies.

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India Outlook Summary

Real GDP Growth (%)

Consumer Price Inflation (%)

Exchange Rate per USD*

Current-Account Balance**

*Annual average, **Billions of US dollars

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51

The Middle East and North Africa

Oil prices have retreated as market concerns have shifted from potential supply

disruptions to the Eurozone crisis and its impact on global demand.

US and EU sanctions are severely hurting Irans economy, but are unlikely to alter

the course of Irans nuclear program.

Political turbulence and social unrest cloud economic prospects in Bahrain, Egypt,

Morocco, Syria, and Yemen.

Regional crises are driven by both political and social pressureshigh

unemployment, high and rising living costs, and low standards of living.
Political uncertainties will weigh on business and investment decisions.
Addressing job creation and competitiveness will be critical to regional stability

over the medium term.

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52

Real GDP Growth in the Middle East

(Annual percent change)

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53

Sub-Saharan Africas Economic Development Challenges

Commodity export revenues continue to drive the regions robust growth.
Exports to Asia and foreign direct investment by China are gaining importance.
Fiscal and external balances are improving.
The regions average inflation, while still relatively high, is abating.
The Eurozones debt problems and recession adversely affect trade, remittances,

aid, credit, and foreign direct investment.

Poor infrastructure, political instability, and corruption remain constraints on

economic development.
Management of mineral resources will be key to economic diversification and

poverty reduction.

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54

Angola and Nigeria Will Lead Real GDP Growth in Africa

(Annual percent change)

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Sources of World GDP in 2011

(Percent of world GDP, measured in US dollars)

US
21.5%
China 10.4%
India
2.7%

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56

Asia Will Be the Worlds Top Producer in 2021

(Percent of world GDP, measured in US dollars)
US
17.1%
China 19.1%
India
5.4%

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57

Some Alternative Global Scenarios

Scenario

Signposts

Eurozone Meltdown

Greece exits the Eurozone with adverse consequences.

Spains housing market, banks, and economy continue a
downward spiral; sovereign debt burden escalates.
Contagion spreads to Portugal, Italy, and France.

Iran Oil Price Shock

Western sanctions severely damage Irans economy.

Iran acts to close the Strait of Hormuz in early 2013.
Oil prices soar initially, then retreat as mines are cleared,
strategic reserves are released, and markets adapt.

US Fiscal Cliff

Fiscal deadlines in early 2013 pass, resulting in a fiscal

contraction equal to USD500 billion, or 3.1% of GDP.
Tax cuts expire next January.
Sequestration leads to big cuts in defense spending.

China Hard Landing

Bubbles in the real estate market burst.

Loan defaults by developers and local governments
trigger a banking crisis and credit squeeze.
The government responds with limited fiscal stimulus.

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58

Summary
The Eurozone will struggle with weak growth and sovereign debt problems;

necessary reforms will encounter resistance and take years to work.

The US expansion will continue at a modest pace, restrained by fiscal tightening.
Chinas protracted slowdown is prompting new government stimulus.

Asia will lead global growth, while Latin America and Africa will do relatively well

by historical standards.
Geopolitics and policy mistakes are the main sources of risk.

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59

Thank you!
Sara Johnson
Senior Research Director, Global Economics
sara.johnson@ihs.com