April data indicated some possible loss of growth momentum for the global economy, May data confirmed it. That most 2012 full year forecasts below are little changed, however, is principally due to Q1 GDP generally being stronger than expected thereby partially offsetting downgrades to later quarters in the year. It appears increasingly likely that growth in the current quarter could well disappoint and the key to current year GDP forecasts being realised will be whether the second half acceleration that many forecasters had pencilled in actually happens.
Last month it was noted that while growth in the developed economies was expected to remain sluggish, with the euro area and the UK in recession but support from moderate growth in the US, ongoing strength in the emerging world would keep the global economy growing at close to—or a little below—trend. Economic news from a broad swath of emerging countries including China, India and Brazil, however, has led to a serious questioning of this last assumption. Most recent data indicate that Chinese growth is running at around 6.5% p.a. in the current quarter, below target but before government stimulus measures take effect. China certainly has the ammunition to add stimulus but the total size of support programmes is likely to be less than half that of 2009’s Rmb 4 trillion ($590 billion) package. Macro data have slowed in Brazil with some forecasts for this year dropping to around 2.0%-2.5% from 3.5% previously, while India reported Q1 GDP growth of 5.3% year-on-year, the slowest growth rate in nearly a decade.
Economic reports and survey data in the developed world, while not surprising to the extent of the emerging economies, still managed to disappoint, with the Citigroup Economic Surprise index for the G10 countries falling to its lowest level since Q3 last year. In the US, much weaker than forecast non-farm payrolls only served to confirm earlier signs that the US economy is cooling. This is adding another ingredient to global growth concerns, as it had been hoped that a stronger US economy would be a stabilising factor.
In general, euro area PMIs were lower than predicted, while a sizeable downturn in the German Ifo survey, as well as other data, all warn of a potentially more disappointing outturn. Underlying UK growth is perhaps somewhat stronger than the recessionary conditions implied by headline GDP, while Japan provided one bright spot in an otherwise sombre world as growth forecasts were revised higher over the month of May.
The key to global angst is, of course, developments in Europe with the financial crisis escalating again during May. Greek elections continued to fuel talk of an eventual ‘Grexit’ from the euro, while the fault lines in the Spanish banking system were cruelly exposed with the collapse of Bankia, the second largest bank by domestic deposits.
With an EU-induced global growth scare also undermining confidence, turmoil returned to the financial markets. Over the month risk assets fell heavily as investors headed for the safest investments in every asset class. Equities essentially retraced prior year-to-date gains with emerging market equities worst hit. Cyclical sectors suffered most and commodity prices slumped with Brent crude collapsing nearly 20% to below $100/barrel.
Conversely, main market government bond yields declined to record lows with 10-year gilts unbelievably below 1.5% at one stage and 2-year German bunds selling briefly at a negative yield! Currencies experienced similar trends with the main safe havens, the yen and dollar, surging against all comers while many emerging market currencies suffered a wave of outflows.
As June began, the financial crisis in Europe and the global growth scare had become sufficiently serious to warrant renewed policy action. Further G7 monetary easing is in the pipeline, additional stimulus should soon be affected in China and in Spain.
Click here for an evaluation of June’s Spanish bailout news.
