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Global growth slowdown could spur broad-range monetary easing
By Citigroup research |
July 2, 2012, Monday
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GLOBAL growth prospects are worsening, reflecting the euro-area crisis and emerging market slowdown. This month, we are cutting our global growth forecasts for both 2012 and 2013, and remain well below consensus and IMF forecasts for both years.
We now expect global growth of 2.6 percent this year and 2.7 percent in 2013, down by 0.1 percent for 2012 and down by 0.2 percent for 2013 from last month. This is the second consecutive downgrade to our 2013 global growth forecast and the first for 2012.
A broad-based emerging market slowdown is now underway, and we are making substantial downgrades this month to our 2012-13 growth forecasts for Brazil, China, India, Indonesia, Hungary, Korea and South Africa.
The European Monetary Union crisis is likely to worsen, with widespread recessions, banking sector strains and deficit overshoots.
We expect the upcoming EU Summit will produce a political commitment to move towards a "banking union" for euro-area countries over time, but do not expect this will resolve the crisis.
Bailouts for Cyprus and the Spanish banks are likely to be agreed soon, and both Italy and Spain are likely to enter some form of Troika bailout for the sovereign before end-2012.
Near term (next 2-3 quarters), we continue to expect at least one sovereign rating downgrade by one major agency for Italy, Spain, Greece, Ireland and Portugal. Over the next 2-3 years, we expect a wider range of sovereign downgrades, including the US, Japan, France and the Netherlands.
Economic weakness
Over the next 2-3 years, we expect that a combination of fiscal and economic weakness, high market yields, and the need for some form of sovereign bailout will see Italy and Spain reduced below investment grade by at least one major agency.
We expect further widespread monetary policy loosening in coming months.
The European Central Bank is likely to cut rates by 0.25 percent at the July meeting, and will probably resume its multiyear Long-term refinancing operations program soon after. The UK is likely to restart quantitative easing at the July meeting.
For China, additional policy measures this year could include two more rate cuts to boost demand and two more reserve requirement ratio cuts to bring money growth to 14 percent. The other BRIC countries are also likely to loosen monetary policy in the second half of 2012.
For the US, the Federal Reserve's decision to extend Operation Twist may not be the last easing step, and extra QE will be likely if recovery appears threatened or the outlook deteriorates significantly further.
The article is an abstract of the Global Economic Outlook and Strategy report issued by Citigroup's research unit on June 27.
We now expect global growth of 2.6 percent this year and 2.7 percent in 2013, down by 0.1 percent for 2012 and down by 0.2 percent for 2013 from last month. This is the second consecutive downgrade to our 2013 global growth forecast and the first for 2012.
A broad-based emerging market slowdown is now underway, and we are making substantial downgrades this month to our 2012-13 growth forecasts for Brazil, China, India, Indonesia, Hungary, Korea and South Africa.
The European Monetary Union crisis is likely to worsen, with widespread recessions, banking sector strains and deficit overshoots.
We expect the upcoming EU Summit will produce a political commitment to move towards a "banking union" for euro-area countries over time, but do not expect this will resolve the crisis.
Bailouts for Cyprus and the Spanish banks are likely to be agreed soon, and both Italy and Spain are likely to enter some form of Troika bailout for the sovereign before end-2012.
Near term (next 2-3 quarters), we continue to expect at least one sovereign rating downgrade by one major agency for Italy, Spain, Greece, Ireland and Portugal. Over the next 2-3 years, we expect a wider range of sovereign downgrades, including the US, Japan, France and the Netherlands.
Economic weakness
Over the next 2-3 years, we expect that a combination of fiscal and economic weakness, high market yields, and the need for some form of sovereign bailout will see Italy and Spain reduced below investment grade by at least one major agency.
We expect further widespread monetary policy loosening in coming months.
The European Central Bank is likely to cut rates by 0.25 percent at the July meeting, and will probably resume its multiyear Long-term refinancing operations program soon after. The UK is likely to restart quantitative easing at the July meeting.
For China, additional policy measures this year could include two more rate cuts to boost demand and two more reserve requirement ratio cuts to bring money growth to 14 percent. The other BRIC countries are also likely to loosen monetary policy in the second half of 2012.
For the US, the Federal Reserve's decision to extend Operation Twist may not be the last easing step, and extra QE will be likely if recovery appears threatened or the outlook deteriorates significantly further.
The article is an abstract of the Global Economic Outlook and Strategy report issued by Citigroup's research unit on June 27.
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