DUBAI: During 2012 global economies saw ups and downs in the wake of ongoing economic crisis, erupted after the worst recession hit the world. However, the bright spots are developing economies that were less affected by the global financial crisis, where rising employment and strong demand will help support growth.
China’s economy will likely expand 7.8 per cent this year, down from July’s 8 per cent forecast, though a pickup in construction projects is expected to spur growth late in the year.
India’s economy will grow 4.9 per cent, down from 6.1 per cent. And Brazil’s growth will be only 1.5 per cent, compared to 2.5 per cent.
The IMF advised policymakers to devise stronger medium-term fiscal and structural reforms to shore up confidence in the growth potential of the advanced economies. Only then, will investor confidence in markets and public debt be restored. “Unless governments spell out how they intend to effect the necessary adjustment over the medium term, a cloud of uncertainty will continue to hang over the international economy, with downside risks for output and employment in the short term,” it said.
Fitch Ratings has reduced its global economy growth outlook for 2012, 2013 and 2014, noting there are risks to the economic recovery, despite the multiple monetary recovery plans proposed. The economic statistics and the recent indexes “shed light on the lasting weakness of the growth and risks to the global economic recovery,” the agency says.
In its three-month report the agency announced its new economic forecasts for the current and next two years. According to the agency the global economy will grow 2.1 per cent, 2.6 per cent and 3 per cent in 2012, 2013 and 2014. Earlier Fitch predicted growth of 2.2 per cent, 2.8 per cent and 3.1 per cent.
Fitch Ratings has cut its 2012 growth forecasts for China to 7.8 per cent from 8 per cent and India to 6 per cent from 6.5 per cent. Both regional giants face a deteriorating global growth outlook with diminished willingness or capacity to respond with domestic policy loosening, compared with 2009.
Slower exports are weighing on China’s growth, but Fitch views the slowdown as also reflecting the authorities efforts to squeeze consumer and house-price inflation out of the system after the strong credit-led stimulus of 2009-2010. Fitch expects slowing construction activity to knock about 0.8 percentage points (pp) off China’s growth in 2012.
The agency expects only marginal policy loosening unless the labour market deteriorates sharply. Fitch does not expect a “hard landing” in China given the authorities’ scope for fiscal and monetary policy flexibility if they choose to use it. The resilience of the labour market seen in current data suggests growth of 7.5 per cent - 8 per cent may be in line with the economy’s potential rate.
Weak corporate profitability poses downside risk for China’s economy. This could eventually incline firms to shed labour which would in turn affect consumption, currently a resilient part of the outlook. Real estate and construction have been a source of downside risk given the authorities’ restrictive policies in the sector following its rapid growth in 2009-2011.
However, the residential real estate market has shown some signs of turning the corner in summer 2012, which leans against a negative outcome. A significant deterioration in financial stability and in the ability of the banks to transmit monetary loosening is another but more remote risk to the outlook. India’s economic outlook remains challenging. Investment rose just 0.7 per cent yoy in Q212, with higher-frequency indicators pointing to another weak outturn in Q3.
Ongoing concerns over government economic and investment policy may be weighing on business confidence. The authorities’ ability to respond with looser policy is constrained by India’s high inflation, fiscal deficit and public debt. Fitch projects India’s general government deficit at 8.5 per cent of GDP in fiscal 2012, leaving little room for fiscal easing.
A number of quarters of weak investment, in turn, may be starting to affect the economy’s supply capacity, pointing to a weaker growth outlook. The authorities have announced a range of reforms in September 2012 including liberalization of FDI in multi-brand retail which may help to restore confidence and lift investment, although the volatile political environment points to implementation risk.
The growth outlook is holding up better elsewhere in emerging Asia in part because of the growing importance of domestic demand in many regional economies. The 0.3pp reduction in Korea’s forecast for 2012 to 2.5 per cent is modest and underpins the open, trade-driven economy’s resilience, a key factor behind Fitch’s upgrade of the Korean sovereign to AA- in September. Growth in Malaysia and Thailand will benefit in the short run from public-sector-led investment.