HSBC economics team provides it's latest quarterly outlook
27 Jul 2012
The global economy - still sickly
Five years on from the onset of the credit crunch and the global economy is still afflicted by several serious ailments. The revival that got underway in the latter part of 2009 has fizzled out. The sovereign debt crisis in the Euro Area is obviously the most acute condition afflicting the global economy, but its malign effects have been exacerbated by a slowdown in the large emerging economies, which have needed to deal with a potentially serious bout of over-heating.
But with all of this already factored into HSBC's forecasts, changes in the global aggregates since our previous report are minimal. Global GDP is still expected to expand by a modest 2.1% this year, accelerating only gently to 2.5% in 2013 (previously 2.6%). The advanced economies are expected to achieve only paltry growth of 1.0% this year (previously 0.9%), with the projection for 2013 remaining unchanged at 1.3%. Meanwhile, the growth expected from the developing economies has been trimmed by 0.2 percentage points both this year and next, but remains buoyant at 5.2% and 5.8% respectively.
Just as in 2011, hopes for economic recovery in the Eurozone have been stymied by a resurgence of the debt crisis, with shock waves spreading to the rest of Europe and beyond. The results of the monthly business surveys suggest that, after stabilising around the turn of the year, economic activity has since been contracting at a steady pace. Official statistics showed the Eurozone economy to be flat in the first quarter, with modest growth in Germany just sufficient to offset the declines on the periphery. Only a major quirk of the statistics will prevent a negative reading for the second quarter, probably of around 0.4%.
Recent summit meetings have made useful progress towards stabilising the debt crisis, in particular the agreement in principle to establish a pan-Eurozone banking supervisory body, which will be able to recapitalise ailing banks directly without the funding being added to the already-stretched balance sheets of national governments. Italy and Spain still face dangerously high borrowing costs, and market sentiment remains fickle. The key areas of uncertainty in the months ahead relate to whether Spain will need a full-blown sovereign rescue (rather than just a package to recapitalise its banks), and the outcome of negotiations between the Troika (IMF, EU, and ECB) and the newly-elected government in Greece.
The best that can be hoped for is that the debt crisis can be contained. An all-embracing solution is likely to take several years to put in place. In the meantime, financial markets, businesses, and policymakers will just have to learn to live with it, and trust that the politicians will do whatever is necessary to prevent a major financial crisis. Certainly, the risks of any country leaving the Eurozone in the short term seem to have receded. In the absence of further mishaps, household and business confidence should revive gradually during the months ahead. But a return to positive economic growth will have to wait until next year. By then inflation rates will have abated sufficiently to bring an end to the squeeze on real disposable incomes. But with fiscal austerity still ongoing and export demand from emerging economies not quite as brisk as in 2010 and 2011, the Eurozone's GDP is only expected to expand by a marginal 0.3% in 2013.
The economic recovery has again lost traction in the United States. In the second quarter of 2012, the pace of job creation, as measured by the monthly change in non-farm payrolls, averaged around 75,000 a month, barely enough to keep pace with population growth, and markedly slower than the monthly average of more than 200,000 in the first quarter. The main culprit is another phase of belt-tightening by households, who remain keen to pay down debt. Export demand has also faltered, while federal and state spending remains under pressure. With GDP expected to grow by around 0.3% in the second quarter, the outturn for 2012 as a whole is set to come in at just under 2%. Although that seems positively buoyant by European standards, it is well below what Americans and their politicians expect in a recovery phase. With the rate of unemployment still stuck at over 8%, there remains a possibility that the Federal Reserve will embark on yet more quantitative easing later in the year. But the biggest concern remains the lack of progress by the politicians in addressing the 'fiscal cliff' off which the economy could plunge at the start of 2013 as a series of tax cuts and stimulus measures expire simultaneously.
In China, the pace of economic growth has now been slowing since the start of 2011. Although the authorities have set a target for GDP growth of 7.5%, the speed with which they have moved to reduce benchmark interest rates suggests that the present slowdown may be testing their comfort zone. In any case, China's GDP figures cannot be taken entirely at face value, with many analysts suspecting that the authorities apply a degree of smoothing. In the run-up to the change of leadership early next year the political situation is highly sensitive, given the ongoing debate within the Chinese Communist Party about how the country's economic model should evolve. But at least the authorities still have plenty of ammunition in the policy locker. While it is possible that benchmark interest rates could be cut further, the emphasis for the remainder of this year is likely to be on easing the reserve requirements imposed on the commercial banks.
Elsewhere in the emerging world, growth rates have generally slowed in response to the past efforts of policymakers to ward off the threat of over-heating. Where inflation rates have fallen, as in the case of Brazil, central banks are already actively cutting interest rates. In other cases, such as India and Turkey, where inflation has proved to be stickier and/or where current account deficits are too big for comfort, their scope for action is constrained.
The UK - easing the squeeze
The British economy is back in 'technical' recession, with official statisticians reckoning that GDP contracted by 0.4% in the final three months of last year and by a further 0.3% in the first quarter of 2012. The growth projections for this year have therefore been revised down, not because of any change of view about what happens from here on, but purely on account of the worse-than-expected start to the year. GDP is therefore now expected to expand by a marginal 0.1% in 2012 as against the previous forecast for growth of 0.8%.
There have clearly been erratic factors at work which have acted to depress the official GDP readings, including the volatile trend of construction activity and the interruption to gas production from the North Sea following the shutdown of the Elgin platform.
But there is also a strong suspicion that something is awry with the official data. The Purchasing Managers' Index (PMI) surveys weakened during the second quarter, but the responses point clearly to continued expansion in the private sector, albeit that the pace slackened. The composite PMI, which aggregates the responses from the manufacturing and services sector surveys, produced an average reading of 54.9 in the first quarter (consistent with modest expansion), slowing to 52.1 (suggestive of sluggish growth, but growth nonetheless) in the second quarter.
Perhaps more telling has been the recent improvement in the labour market. Not only has the number of unemployed fallen, but the number of people in work has increased, and at a solid pace. Indeed, the Labour Force Survey now reports that the number of people in work, at 29.55 million in the period from March to May, was at its highest since 2008. It may be reasonable for employers to hold onto skilled and loyal staff during a downturn in the expectation of better times ahead and bearing in mind the costs involved in firing and hiring. But to actively recruit more people would be verging on insanity. So unless the UK's business community has collectively gone soft in the head, it seems more likely that they are recruiting to meet tangible improvements in demand, which ought to be reflected in the official GDP data. So, expect some hefty revisions and an accompanying political row at some point in the future.
The approach of the Government and the Bank of England during the past few months can best be described as 'a semblance of activity'. There have been a series of announcements about infrastructure projects, but these will make only a minor difference in the great scheme of things and even the underwriting of £40 billion won't deliver any diggers on the ground until next year. Meanwhile, the Bank of England has implemented another raft of quantitative easing, taking the total of asset purchases from £325 billion to £375 billion. But this approach has little mileage left in it, and in any event even the Bank of England suspects that each successive bout is having a diminishing impact. More important was the announcement in June of the Funding for Lending Scheme (FLS), which aims to offer banks cheap finance provided that they lend it on to households and businesses.
All of these measures are worthwhile in themselves, but they are only palliatives. They cannot lift an economy from recession or stagnation back to trend growth, nor can they drown out the noise coming from the ongoing and unresolved debt crisis in the Eurozone.
Far more important than anything the policymakers have done or are likely to do is the rapid easing of consumer price inflation. Helped by lower oil prices, the headline annual rate has tumbled from 3.5% in March to just 2.4% in June. With the government also deciding not to go ahead with the planned increase in fuel excise duty in August, There is a good chance that the annual rate of inflation will be back below the 2% target before the end of the year. This will effectively end the long and harsh squeeze on households' real disposable incomes, which has been a principal cause of the UK's weak economic performance since the second half of 2010.
With the usual caveat about containing the Eurozone's debt crisis, the going will get easier for the British economy from here. The Olympics will give a welcome fillip in the third quarter, not least because the amount spent on tickets will then be taken into account. Then, by the autumn inflation should have abated sufficiently to begin giving consumers a little headroom to increase their spending.
Nobody should expect a return to the free-spending days pre-2007, but even a transition from declining household expenditure to modest growth will make a marked difference to the economy's overall performance. Having declined by 1% in 2011 and likely to be flat this year, consumer spending is expected to grow by around 1.5% in 2013. While trading conditions for many exporters are likely to remain tough on account of the difficulties in the Euro Area, British firms are re-focusing their efforts towards other markets, so that if demand holds up from the United States and the emerging economies it is still likely that net trade (the difference between exports and imports) could make a modest positive contribution to economic growth during the next 18 months. The biggest imponderable is fixed investment, which has been running at very depressed levels in the past few years, not only on account of government spending cutbacks, but also because of a loss of confidence by the private sector. If the typical post-recession investment recovery was to get going during 2013, then there would be a very good chance of the economy beating the growth forecast.
In the meantime the Bank of England will continue to keep monetary policy extremely loose. Even if everything works out as well as can be expected, no interest rate rises are expected before the early months of 2014, with progress thereafter being gradual. The Government, for its part, will hope that a modest revival of consumer expenditure will ease the pressure for a change to its fiscal stance. The government's record low borrowing costs and the UK's 'AAA' rating cannot be taken for granted. By the standards of many other countries, especially in the Eurozone, Britain is already taking a fairly laid-back approach to fiscal austerity. Further slippage, or a change of tack, would not go down well with the markets.
Prepared by the HSBC Business Economics Team
This document is published by HSBC Bank plc ("HSBC Bank") as a piece of economic research for information purposes only. It is not intended to constitute investment advice, and no liability can be accepted by HSBC for recipients acting independently on this content. The information presented here is based on sources believed to be reliable, but HSBC Bank accepts no liability for any errors or omissions. Unless otherwise stated, any views, forecasts, or estimates are those of the Business Economics Department of HSBC Bank, which are subject to change without notice.