Global economy faces three key risks in 2012

Published April 5th, 2012 - 08:20 GMT
Emerging Markets will lead the global expansion
Emerging Markets will lead the global expansion

Randolph's outlook focused on the main global driving economies: The United States, the euro zone, Japan and emerging Asian markets. Randolph is a seasoned international economist and financial markets commentator on television and radio including Bloomberg, CNBC and Reuters TV, and has written extensively in the press, including the Financial Times, Washington Post, Newsweek, Observer and Business Week. He is also the director of Sovereign Risk with IHS Global Insight, based in London, where he has successfully adapted the risk management and internal rating modeling techniques for cross-country bank exposures to provide clients with a unique sovereign risk rating system for over 200 economies worldwide. He has both policy and hands-on experience in international risk management, especially in Emerging Markets.

"The global economy faces three key risks in 2012, first an oil price shock from supply disruptions in the Middle East, second the euro zone sovereign debt problems and lastly, China's real estate market downturn. These are interesting economic times as the impact of the 2008 financial crisis is still present and generating aftershocks such as the sovereign debt crises. However recent data suggests that global growth will pick up. Inflation worldwide has moderated, enabling more central banks to ease monetary policies," he said. Global GDP growth expected for 2012 and years to come show that Asia-Pacific will achieve the fastest real GDP growth at levels ranging between 6 percent and 7 percent annually between 2012 and 2020.

Western Europe is expected to grow at the lowest global levels ranging between a negative growth in 2012 and less than 2 percent till 2020. Overall global economies are expected to grow between 2 percent and less than 6 percent. Brent crude oil prices on the other hand are expected to sustain above $110 levels between 2012 and 2017. Prices are driven by sustained growth in EM, concerns over Iran's nuclear program and sanctions over the country, security challenges in Iraq and Nigeria, limited growth in non-OPEC supplies between 2012 and 2013, and the moderate influence of increased production from US tight oil fields and Canadian oil sands. Randolph shared the following outlook on global economies: The US expansion will continue at a modest pace, restrained by inevitable fiscal tightening. The private sector will continue its deleveraging, and strengthening job growth will support consumer income and spending. The euro zone is in a mild recession and growth is expected to resume by mid-2012.

The risks of a disruptive sovereign debt crisis have diminished. Japan is suffering a loss of export competitiveness, and the reconstruction post the March 2011 earthquake and tsunami is proceeding slowly. Asia will lead global growth and Emerging Markets (EM) will continue to offer the best prospects, but not without risks. EM will also enjoy robust growth despite an export deceleration. As for China, its economy will achieve a soft landing, provided that the housing market downturn does not turn into a crash. Latin America and Africa will do relatively well by historical standards. On the US, Randolph said: "The corporate sector is rich in liquidity but lacks opportunities to invest, therefore guiding investors to place their money in safe-havens where risk aversion is very high. The US economy recovery continues to be pressured by the unresolved real estate." The US growth will exceed growth in the euro zone and Japan, reaching an expected 2 percent in 2012 and increasing year on year until 2016. Recent employment figures show encouragement - consumers and businesses are cautiously increasing their spending, the outlook on exports is favorable after 2012, and the dollar real exchange value will depreciate against EM's currencies.

A rebound in the housing markets remains key to a more robust economic growth. The threat of the euro zone sovereign debt problems has eased. Fiscal policies will tighten, however timing and scope are uncertain. Oil prices risks have risen. The probability of a return to recession is today at 20 percent. In Europe, the current mild recession is expected to end starting the third quarter. The euro zone fiscal deficits are decreasing, the fiscal balance is expected to register a negative 3 percent of the GDP in 2012 and continue to ease to a negative 2 percent approximately of the GDP on 2013. Randolph said: "The European Central Bank's massive lending to banks has helped ease credit conditions and reduce government bonds yields. To survive, the euro zone will move towards closer fiscal integration, and Germany is key in achieving this step.

The euro is expected to depreciate to a low $1.25 in the autumn of 2013." He added: "Italy and Spain are making progress on structural reforms under their respective new leadership and the contagion risks from Greece have diminished.  Greece however remains in a dire situation and the probability of it exiting the euro zone in the next three years is 40 percent and that could trigger a financial crisis and deep recession, dragging down the US. Contagion will be contained if Greece remains in the euro zone and the European Central Bank supplies ample liquidity." "EM have led the global growth since 2009, and even though we might not see double digit growth rates in China anymore, the growth rate of 6 percent or 7 percent is still very high. And it is interesting to see that China and Germany are slowing down together. China's performance is parallel to Europe," said Randolph.

EM will lead the global expansion. China and India will lead growth in EM with the highest real GDP growth between 2012 and 2016. And by 2021, Asia will be the world's top producer, grabbing 34.6 percent of world GDP. China alone will grab 19.6 percent, in comparison to a low of 6.1 percent for the Middle East and Africa.

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