In their monthly Global Forecast Update entitled Mind the Gap released today, Scotia Economics forecasts the pace of economic activity in advanced nations will be quite slow and uneven through 2012, while moderating output growth in the larger and faster-paced emerging economies is forecast to remain comparatively strong.
According to the report, the growth gap between the emerging and advanced nations has progressively widened over the past three decades, from essentially no gap in the 1980s to over five percentage points near the end of the 2000s. The gap initially reflected the much stronger economic performances of the emerging economies, but the differential is being kept wide by the increasing underperformance of the advanced nations.
“The growth gap between emerging and advanced economies is expected to remain wide,” said Warren Jestin, Chief Economist, Scotiabank, “with most advanced nations already embarked upon a multi-year period of household deleveraging and fiscal consolidation – developments that will keep their output in the slow lane of growth.”
Mr. Jestin added that “emerging nations have the fiscal and financial flexibility to underpin solid economic gains in their home markets, a development that remains supportive over the longer term for international trade and commodity markets.”
Scotia Economics’ forecasts had already assumed slower growth in the advanced economies both this year and next, with many households opting to reduce their debt burdens in unsettled times, the pace of fiscal restraint gathering momentum, and credit conditions in Europe and the United States challenged as financial institutions focus on recapitalizing their balance sheets and tighter regulatory guidelines. The early-year surge in commodity prices and the disruptions in the global manufacturing supply chain triggered by Japan’s mid-March catastrophe only compounded the slowdown.
Heightened political uncertainty in recent months has aggravated the slow pace of reforms critical to reducing the significant deficit and debt problems in the euro zone and the United States, with the broad financial market and confidence shake-out around the world threatening the durability of the tepid recovery underway.
“A quick and effective resolution to the euro zone’s severe sovereign debt and banking sector problems, and a credible deficit-reduction strategy in the United States are critical to prevent further contagion, restore financial market stability, rebuild confidence, and enable the two largest economic regions in the world to regain stronger momentum through the second half of 2012,” said Aron Gampel, Deputy Chief Economist, Scotiabank.
Japan’s massive rebuilding efforts and the rebound in auto and electronics manufacturing will lift the economy to the top of the advanced nations’ growth ladder through the remainder of this year and most of 2012. Australia is also expected to remain a relative outperformer because of its close commodity and trade linkages with the still strong Asia-Pacific region.
The North American economies have slipped to the middle of the advanced nation growth ladder. Mexico’s prospects have been reduced by the sharp slowing in U.S. activity, though the country’s strong competitive position and more regionally diversified trade will keep industrial activity and domestic spending at a reasonably high level. Canada also faces stiffer headwinds, with the renewed slumps in the United States and Europe dampening non-resource shipments. Some softening in employment conditions and a more subdued housing market will contribute to the lower growth profile, though the buoyancy in resource-producing regions that is being underpinned by continuing large investments will remain an important contributor to growth.
The U.S. economy continues to be weighed down by significant and lingering problems. The housing slump shows no sign of a quick turnaround. The weak job recovery has stumbled again, putting a further squeeze on household incomes and discretionary spending. Exports remain a relative bright spot, with transportation equipment and technology sales leading the way. Even so, the sharp drop in confidence associated with the budgetary deadlock, and the prospect of intensifying fiscal retrenchment, point to weak and uneven growth for a good part of 2012.
Fiscal restraint will dominate European prospects for the foreseeable future. Among the peripheral European nations, intensifying budgetary cutbacks and increasing unemployment have severely constrained activity. The contagion from the sovereign debt crisis is contributing to a falloff in growth in the larger European economies, most notably in Italy and Spain, but also in Germany and France as increased consumer and business caution sweep the region and regional trade slows. Significant fiscal restraint and the resulting slowdown in domestic demand will keep U.K. growth slightly below one per cent this year and next, notwithstanding preparations for the 2012 Summer Olympics.
China is expected to remain the global growth leader, though the combination of domestic credit restraint and slowing international demand will trim its output growth to around nine per cent next year. India’s strong domestically generated expansion will continue to keep the country’s growth rate around eight per cent. In Brazil, prior policy tightening and a stronger currency — both have reversed somewhat in recent weeks — will contribute to a slower pace of activity, though the country will remain a strong performer because of significant investments in manufacturing and resources. Peru and Chile will continue to post comparatively stronger regional growth on the back of ongoing capital investments in their expanding resource sectors.
“Financial markets can be expected to remain very volatile amid slower global growth and heightened economic and political uncertainty,” concluded Mr. Jestin. “Interest rates in the advanced nations have declined to historically low levels alongside increased risk aversion and monetary accommodation, though longer-term yields are still vulnerable to the upside later next year as the financial turmoil eases and economic conditions stabilize.”
The report also notes that the U.S. dollar has soared alongside the shift into highly liquid U.S. assets, though progress in resolving the deficit and debt problems in the euro zone and the United States should allow risk assets and most currencies, including the Canadian dollar, to begin retracing some of their recent losses.
Scotia Economics provides clients with in-depth research into the factors shaping the outlook for Canada and the global economy, including macroeconomic developments, currency and capital market trends, commodity and industry performance, as well as monetary, fiscal and public policy issues.
For further information:
Patty Stathokostas, Scotiabank Media Communications, 416-866-3625, [email protected]