Quarterly Economic Forecast
Quarterly Economic Forecast
TD Economics www.td.com/economics
June 17, 2010 HIGHLIGHTS • The global economic outlook has two distinct groups of countries with contrasting prospects. In the one camp, emerging economies – such as China, India, and Brazil are growing at above-trend speeds and facing the threat of a flare-up in inflation. This has prompted their central banks to start tightening their monetary stance • In the second camp, European countries confront very poor growth prospects caused by unavoidable fiscal retrenchment, and this will lead to disinflationary pressures. As a result, monetary policy will remain exceptionally stimulative for longer than previously anticipated throughout our forecast horizon • Between these two polar extremes lies the U.S. and Canada. Their economies have seen a firming recovery in recent months. However, both countries will experience a moderate slowdown in the coming quarters due to unwinding fiscal stimulus and a less favorable external environment Craig Alexander SVP and Chief Economist, mailto: [email protected] Beata Caranci AVP and Deputy Chief Economist, mailto: [email protected] Martin Schwerdtfeger Economist, International mailto: [email protected]
GLOBAL ECONOMIC OUTLOOK: A TWO-SPEED RECOVERY A very clear divergent global growth outlook has emerged since our March forecast. On the one hand, developing economies such as China, India, and Brazil are beginning to focus on how they will tame rising inflation without choking an economic recovery that is proving stronger than previously anticipated. On the other hand, growth in Europe will be significantly challenged by across-the-board fiscal consolidation efforts. Among the middle fielders of this two-speed recovery are Canada and the U.S., currently expanding at a sound clip, but also with some moderation in economic growth likely in the coming quarters. The combination of disparate regional forecasts yields a downgrade to our global growth projection of 0.1 percentage points (pp) to 4.0% in 2010, and a further deceleration to 3.6% in 2011 (down 0.4 pp with respect to March’s figure). Europe: Weathering the sovereign debt storm
Clouds over European skies will not dissipate any time soon. The sovereign debt situation involving some advanced and peripheral European nations has prompted us to further reduce our economic growth forecast for the region. The eurozone is now expected to grow 0.9% this year and 1.1% in 2011, down 0.4 pp and 0.5 pp from our March forecast, respectively. These figures reflect not only slower expansions in Germany, France, and Italy, but also the 2010 economic contractions projected for Spain, Greece, and Ireland. Efforts to trim bloated fiscal Real GDP Growth deficits will weigh down on eco2007 * Forecast Share nomic activity as governments (%) 2009 2010 2011 scale down spending and raise Eurozone (EU16) 100.0 -4.0 0.9 1.1 taxes. Not only have Greece, Germany 27.3 -4.9 1.6 2.0 Spain, Portugal, and Italy anFrance 20.1 -2.5 1.4 1.6 nounced fiscal consolidation ef- Italy 17.4 -5.1 0.4 0.6 forts, but France and the United Spain 11.7 -3.6 -0.4 -0.3 Kingdom have also prescribed Netherlands 6.4 -4.0 1.4 1.4 3.8 -3.0 1.6 1.7 themselves a good deal of fiscal Belgium 3.1 -3.5 1.5 1.6 belt-tightening. Even Germany, Austria Greece 2.6 -2.0 -3.7 -2.5 which is in a better fiscal position, 1.9 -7.8 1.3 1.4 announced that it will pursue a Finland Portugal 1.9 -2.6 0.3 -0.2 1%-of-GDP fiscal deficit reducIreland 1.8 -7.1 -0.7 1.0 tion each year during 2011-14 Luxembourg 0.4 -3.4 0.9 0.8 to shrink its current fiscal gap *Weights do not sum to 100% because Cyprus, Malta, Slovakia, to 1% of GDP by 2015. Al- and Slovenia were not included. though healthier fiscal accounts Forecast by TD Economics as at June 2010 are conducive to higher potential Source: IMF, national statistics agencies economic growth in the medium to long term, they undermine economic activity in the short term. A tighter fiscal stance and stubbornly high unemployment will certainly put a lid on private consumption, which will also be held back by household deleveraging and more
Quarterly Economic Forecast June 17, 2010
GROWTH OUTLOOK FOR THE G7 8
Annualized % Chg. 2009
6
2010F
2011F
4 2 0 -2 -4 -6 U.S.
Canada
Japan
Europe *
UK
Source: IMF, national statistics agencies. Forecasts by TD Economics as at June 2010, * Germany, France, Italy
stringent credit conditions across the region. Indeed, aggregate eurozone private consumption was flat during the first quarter relative to a year ago, and the outlook is for it to remain stagnant in the coming quarters. On the other hand, eurozone exports stand to benefit from the euro depreciation triggered by the region’s fiscal woes. Indeed, the common currency has lost roughly 18% of its value versus the U.S. dollar and the Japanese yen since January, and it has suffered a 7% decline vis-à-vis the British pound, the Swiss franc, and the Swedish krona. However, before becoming too optimistic over the eurozone’s newfound export competitiveness, we must remember that roughly 70% of European Union (EU) exports remain within the region, and presumably a large portion of that 70% stays within the eurozone itself, which limits the positive impact of euro depreciation on the members’ exports. To illustrate this point, Germany’s top-30 export destinations in 2009 accounted for roughly 88% of its total exports. Of those, external sales to eurozone countries accounted for roughly 42% of total German exports. And, if we include other top-30 countries such as Denmark, Romania, Hungary, and Poland, whose currencies have depreciated or remained stable vis-à-vis the euro, that figure goes up to 50% of total German exports. Therefore, the euro depreciation will only provide a boost to approximately one half of German exports. In addition, the German exports-to-GDP ratio is the largest within the euro area. Given this, the rest of the region will see a smaller growth dividend from rising export competitiveness. Thus, the positive trade impact of a weaker euro will be significant, but not enormous. Any benefit to export growth from the lower valued euro must be considered within the context of the eurozone’s high ratio
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of inter-region trade and balanced against the prospect of reduced export demand from within the region and from peripheral countries. The latter will be exacerbated by the efforts of member countries with negative current account balances, as they try to limit their reliance on external funding by curbing their consumption of imported goods. To make matters more difficult, the eurozone has a high degree of excess capacity. Industrial capacity utilization is currently at 75.5% and has only regained one third of the peak-to-trough gap since it bottomed in Q3-2009. Tepid domestic demand growth prospects will temper gross fixed investments, which at the aggregate eurozone level were still contracting on a year-ago basis during the first quarter. Against this backdrop of economic slack, inflation is expected to be contained during 2010, which combined with well-anchored inflation expectations creates leeway for monetary policy to remain accommodative for longer than previously anticipated. In all likelihood, the European Central Bank (ECB) will maintain the refi rate at 1.00% well into 2011. For some countries that rest on a stronger economic footing, like Germany, the pass-through of the euro depreciation in combination with an expansionary monetary setting will be highly supportive to their economic recovery and runs the risk of fuelling inflation during 2011. However, this would require a larger uptake in economic slack than currently foreseen. It would also necessitate strong credit growth, which appears highly unlikely. Indeed, the main risk is not strong credit flows, but rather the possibility that the ECB might need to engage in outright quantitative easing if low interest rates fail to spur lending. As we have recently witnessed with the U.S., low interest rates and monetary base expansions do not always translate MONEY AND CREDIT GROWTH 150
Index
Units
18
140 16
130 120
14
110 12
100 90
10
80 Money Supply (M1) -L-
70
8
Total Credit -L-
60
Money Velocity -R-
6
50 Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Source: U.S. Federal Reserve, TD Economics. Money velocity is defined as M1/GDP
Quarterly Economic Forecast June 17, 2010
Annualized % Chg. China
10
India
Latin America
Other Asia Ex. Japan
8 6 4 2 0 -2 -4 2009
2010 (f)
2011 (f)
Source: IMF, National Statistical Agencies, Forecasts by TD Economics as at June 2010
into credit growth. During a downturn, when the economic outlook is filled with risks, banks hoard deposits voluntarily raising their reserves. This limits lending, despite the expansion in monetary base being conducted by monetary authorities. Total lending across the eurozone declined five times during the six-month period ending February 2010. And, although it posted timid increases in March and April driven by households borrowing, the fact that credit to nonfinancial corporations is still declining remains a cause for concern. Furthermore, the ECB’s lax monetary stance will be met by financial institutions seeking to strengthen their balance sheets and reduce their leverage ratios. Uncertainty regarding upcoming changes in global financial regulations could also impede credit expansions. All of these factors will limit the impact of expansionary monetary policy on economic activity and inflation. INDUSTRIAL PRODUCTION 110
Percentage of pre-recession peak
100 90 80 70 60 50 40 Jan-05
U.S.
Germany
U.K.
Canada
Jan-06
Jan-07
Jan-08
Source: National Statistics Agencies, Central Banks
Japan
Jan-09
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3
Asia: Cruising at a remarkable pace
EMERGING MARKET GROWTH PROFILE 12
TD Economics
Jan-10
Weaker growth in Europe will translate into less dynamic Asian exports to the region. However, the EU represents roughly 15% of both Chinese and Japanese total exports. Therefore, although noticeable, the impact of a European slowdown on Asian external sales will not be large enough to threaten the Asian recovery, especially in the context of strong regional growth and a sustained North American upturn. Nonetheless, Asian economies will be on a slower economic growth path as we head into 2011. In Japan, growth was particularly strong in the first quarter, supported by a sharp rebound in exports and a fiscally-induced upturn in total consumption. Going forward, economic momentum across Asia and both North and South America will provide support for Japanese exports, although at a slower pace due to waning global inventory restocking efforts, which helped external sales in the early stages of the recovery. Export growth will face a further headwind from the recent appreciation of the yen. Meanwhile, Japanese capacity utilization is still low relative to historical averages, suggesting new investment in machinery and equipment may also remain subdued in the near term. This will combine with the expected deceleration in consumption growth caused by the winding down of fiscal stimulus to yield a moderation in economic activity. Therefore, the wings of the Japanese recovery will be clipped as we move into 2011, where we have downgraded the growth forecast to 1.6% (-40 basis points since March). China: 2010 is definitely the year of the tiger
In China, massive fiscal and monetary stimulus has kept the Chinese economy running at full throttle in recent months. During the first quarter of 2010, economic activity expanded by a brisk 11.9% Y/Y. This comes on top of last year’s 8.7% increase in Chinese GDP. Moreover, April’s external trade and industrial production figures suggest the economy keeps booming. Despite the People’s Bank of China efforts to limit lending, credit growth has only decelerated slightly. All of this has prompted us to upgrade our 2010 growth forecast for China to 9.9%. However, this figure does capture a gradual deceleration in economic activity towards the end of the year and a convergence to a more sustainable growth rate of 9% in 2011, as recent attempts by the Chinese authorities to cool down the real estate market finally bite. Furthermore, the government will likely take a more proactive stand in winding down fiscal stimulus to avoid overheating the local economy and accelerating inflation – an outcome with costly social consequences.
Quarterly Economic Forecast June 17, 2010
INDUSTRIAL PRODUCTION 110
Percentage of pre-recession peak China
Brazil
India
100 90 80 70 60 50 40 Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Source: National Statistics Agencies, Central Banks
In India, first quarter growth of 11% and increasing inflationary pressures affirm that the Indian economy is also running at full tilt. And, like their Chinese counterparts, Indian authorities have already taken steps to scale back monetary and fiscal stimulus. The central bank has raised rates twice since March, and there is every intention to continue along that path. However, the bottom line is that even though we foresee slower growth patterns in Asia, the economies of China, India and Japan will remain resilient, as they will be cooling down from exceptionally strong rates of growth. Ultimately, this bodes well for the rest of Asia, which will continue to benefit from strong capital goods and commodity exports to these countries. Sustained economic growth momentum in Asia and North America will also spill over to other emerging markets such as Latin America. These economies will benefit from robust gains in commodity exports and strong domestic demand, the latter of which has been underpinned by accommodative fiscal and monetary policies put in place at the onset of the global recession. Here too inflationary pressures may become problematic and will likely rise later this year in many of these countries. In anticipation of this, some central banks in the region have already moved off historically low interests rates (Brazil), or have indicated they are about to do so (Chile). North America: economic growth moderation appears in the horizon
The Canadian and the U.S. economies have kept climbing the recovery hill without any setbacks in recent months. The latest data suggest economic growth will be stronger in
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both countries than we had projected in our March forecast. Consequently, we have upgraded our real GDP growth estimates for 2010 to 3.6% (up 0.5pp) in Canada and 3.2% (up 0.1pp) in the United States. In the second half of 2010 and into 2011, we see a smooth slowdown in both countries. In the U.S., this will be caused by the winding down of fiscal stimulus, a modest recovery in private consumption due to a slow decline in unemployment, and a weaker contribution to growth from net exports yielded by a stronger U.S. dollar and a weaker global economy. In Canada, less fiscal stimulus will combine with slower export demand south of the border and a cooling housing market to deliver a less vigorous overall expansion. As such, we have revised our previous 2011 growth forecast downward to 2.5% for Canada (down 0.4pp) and to 2.8% for the U.S. (down 0.4pp). Details on the updated Canadian and U.S. forecasts can be found on our website at http://www.td.com/economics/forecasts.jsp . Be mindful of risks to forecasts
As usual, there are both upside and downside risks to our global forecast. On the upside, greater resilience of economic activity across Europe could help debt-laden European sovereigns temper the negative impact of fiscal consolidation and avoid the pernicious feedback loop between fiscal tightening and reduced economic growth. This, in turn, would contribute to the firming global recovery and negate the risk of a relapse. Nevertheless, we see this upside risk as a low probability event. There is also the risk that growth in Asia – China and India in particular – does not cool down as quickly as expected, and this provides a more fertile backdrop for production and export growth in many countries, especially emerging markets. However, this could be perceived as both an upside and downside risk because if these economies remain overheated, it could trigger a sharper and more disruptive deceleration down the road. For instance, a bubble burst in China’s real estate market could affect global commodity prices and weaken global economic growth. Therefore, the ability of Chinese authorities to administer a soft slowdown will not only prove critical to the social stability of the Asian region, but it is also a key element underpinning the global recovery. Still, the more detrimental and dominant downside risk to the global economy stems from potential financial disruptions triggered by Europe’s sovereign debt difficulties. Under the assumption that the joint European Union–IMF support program succeeds in addressing market concerns regarding short-term fiscal borrowing and repayment capacity of Greece, Portugal, Spain, and Italy, the recent decline
Quarterly Economic Forecast June 17, 2010
in value sustained by these countries’ debt instruments still hurts the balance sheets of the financials institutions that hold them. The risk is that, eventually, these institutions may need to increase their capital levels in an environment which is turning increasingly less supportive to their funding requirements. Ultimately, banks’ ability to extend credit could be lessened and this could be detrimental to economic growth. In an even worse scenario, one or more European governments might elect to pursue a debt restructuring despite the support of the EU-IMF program, dealing a severe blow to European banks and creating significant financial strains around the world. Concluding Remarks
The global economic outlook has two distinct groups of countries with contrasting prospects. In the one camp, emerging economies – such as China, India, and Brazil - are
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5
growing at above-trend speeds and facing the threat of a flare-up in inflation. This has prompted their central banks to start tightening their monetary stance. In the second camp, European countries confront very poor growth prospects caused by unavoidable fiscal retrenchment, and this will lead to disinflationary pressures. As a result, monetary policy will remain exceptionally stimulative for longer than previously anticipated throughout our forecast horizon. Between these two polar extremes lies the U.S. and Canada. Their economies have seen a firming recovery in recent months. However, both countries will experience a moderate slowdown in the coming quarters due to unwinding fiscal stimulus and a less favorable external environment. And no matter which country you look at, there will be one universal theme playing out: uncertainty regarding Europe’s sovereign debt challenges will continue to rattle financial markets, causing sporadic bouts of volatility.
Quarterly Economic Forecast
TD Economics
June 17, 2010
GLOBAL ECONOMIC OUTLOOK
ECONOMIC INDICATORS FOR THE G-7 AND EUROPE
Annual per cent change unless otherwise indicated 2007 Share* Real GDP (%) World 99.1 North America 25.5 United States 21.4 Canada 2.0 Mexico 2.1 European Union (EU-27) 23.7 Euro-zone (EU-16) 16.1 Germany 4.4 France 3.2 Italy 2.8 United Kingdom 3.3 EU accession members 3.4 Asia 35.5 Japan 6.6 Asian NIC's 3.7 Hong Kong 0.5 Korea 1.9 Singapore 0.3 Taiwan 1.1 Russia 3.2 Australia & New Zealand 1.4 Developing Asia 20.6 ASEAN-4 3.1 China 10.9 India 4.6 Central/South America 6.1 Argentina 0.8 Brazil 2.8 Other Developing 8.4
2008 2.8 0.5 0.4 0.5 1.3 0.8 0.5 1.0 0.1 -1.3 0.5 2.1 4.8 -1.2 1.5 2.2 2.2 1.1 0.1 5.6 2.1 7.4 4.7 9.0 7.3 4.7 6.8 5.1 5.5
2009 -1.0 -2.8 -2.4 -2.5 -6.6 -4.1 -4.0 -4.9 -2.5 -5.1 -4.9 -3.9 1.5 -5.2 -1.0 -2.6 0.1 -2.2 -1.9 -7.9 1.0 5.6 1.2 8.5 5.7 -0.2 0.9 -0.2 1.7
Forecast 2010 2011 4.0 3.6 3.3 2.9 3.2 2.8 3.6 2.5 3.9 3.8 1.1 1.2 0.9 1.1 1.6 2.0 1.4 1.6 0.4 0.6 1.0 1.4 2.0 1.5 6.4 5.7 2.6 1.6 5.5 4.9 5.1 4.9 5.0 4.9 6.1 5.5 6.5 4.7 4.1 3.9 3.1 3.2 8.3 7.6 4.6 4.4 9.9 9.0 8.1 7.4 4.2 3.7 3.2 3.1 6.2 4.1 4.3 4.2
*Regional wts. do not sum to 100% because some countries omitted Forecast as at June 2010 Source: International Monetary Fund, national statistical agencies
6
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2008
2009
Forecast 2010 2011
Real GDP (Annual per cent change) G-7 (41.17%)* U.S. Japan EU-16 Germany France Italy United Kingdom Canada
0.1
-3.5
2.5
2.2
0.4 -1.2 0.5 1.0 0.1 -1.3 0.5 0.5
-2.4 -5.2 -4.0 -4.9 -2.5 -5.1 -4.9 -2.5
3.2 2.6 0.9 1.6 1.4 0.4 1.0 3.6
2.8 1.6 1.1 2.0 1.6 0.6 1.4 2.5
Consumer Price Index (Annual per cent change) G-7 U.S. Japan EU-16 Germany France Italy United Kingdom Canada
3.2
-0.1
1.3
1.2
3.8 1.4 3.3 2.8 3.2 3.5 3.6 2.4
-0.4 -1.4 0.3 0.2 0.1 0.8 2.2 0.3
1.7 -1.0 1.6 1.3 1.5 1.8 2.8 1.8
1.3 -0.2 1.7 1.8 1.4 1.7 1.9 1.8
Unemployment Rate (Per cent annual averages) U.S. Japan EU-16 Germany France Italy United Kingdom Canada
5.8 4.0 7.6 7.3 7.8 6.8 5.6 6.2
9.3 5.1 9.4 7.5 9.5 7.7 7.6 8.3
9.6 5.1 9.9 7.7 10.2 8.6 8.1 8.2
9.1 4.8 9.4 7.7 10.1 8.3 7.4 7.8
*Share of 2007 world gross domestic product (GDP) Forecast as at June 2010 Source: National statistical agencies, TD Economics
For detailed foreign exchange rates forecasts please refer to our June issue of Global Markets
This report is provided by TD Economics for customers of TD Bank Financial Group. It is for information purposes only and may not be appropriate for other purposes. The report does not provide material information about the business and affairs of TD Bank Financial Group and the members of TD Economics are not spokespersons for TD Bank Financial Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. The report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise TD Bank Financial Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.
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June 17, 2010 HIGHLIGHTS • The global economic outlook has two distinct groups of countries with contrasting prospects. In the one camp, emerging economies – such as China, India, and Brazil are growing at above-trend speeds and facing the threat of a flare-up in inflation. This has prompted their central banks to start tightening their monetary stance • In the second camp, European countries confront very poor growth prospects caused by unavoidable fiscal retrenchment, and this will lead to disinflationary pressures. As a result, monetary policy will remain exceptionally stimulative for longer than previously anticipated throughout our forecast horizon • Between these two polar extremes lies the U.S. and Canada. Their economies have seen a firming recovery in recent months. However, both countries will experience a moderate slowdown in the coming quarters due to unwinding fiscal stimulus and a less favorable external environment Craig Alexander SVP and Chief Economist, mailto: [email protected] Beata Caranci AVP and Deputy Chief Economist, mailto: [email protected] Martin Schwerdtfeger Economist, International mailto: [email protected]
GLOBAL ECONOMIC OUTLOOK: A TWO-SPEED RECOVERY A very clear divergent global growth outlook has emerged since our March forecast. On the one hand, developing economies such as China, India, and Brazil are beginning to focus on how they will tame rising inflation without choking an economic recovery that is proving stronger than previously anticipated. On the other hand, growth in Europe will be significantly challenged by across-the-board fiscal consolidation efforts. Among the middle fielders of this two-speed recovery are Canada and the U.S., currently expanding at a sound clip, but also with some moderation in economic growth likely in the coming quarters. The combination of disparate regional forecasts yields a downgrade to our global growth projection of 0.1 percentage points (pp) to 4.0% in 2010, and a further deceleration to 3.6% in 2011 (down 0.4 pp with respect to March’s figure). Europe: Weathering the sovereign debt storm
Clouds over European skies will not dissipate any time soon. The sovereign debt situation involving some advanced and peripheral European nations has prompted us to further reduce our economic growth forecast for the region. The eurozone is now expected to grow 0.9% this year and 1.1% in 2011, down 0.4 pp and 0.5 pp from our March forecast, respectively. These figures reflect not only slower expansions in Germany, France, and Italy, but also the 2010 economic contractions projected for Spain, Greece, and Ireland. Efforts to trim bloated fiscal Real GDP Growth deficits will weigh down on eco2007 * Forecast Share nomic activity as governments (%) 2009 2010 2011 scale down spending and raise Eurozone (EU16) 100.0 -4.0 0.9 1.1 taxes. Not only have Greece, Germany 27.3 -4.9 1.6 2.0 Spain, Portugal, and Italy anFrance 20.1 -2.5 1.4 1.6 nounced fiscal consolidation ef- Italy 17.4 -5.1 0.4 0.6 forts, but France and the United Spain 11.7 -3.6 -0.4 -0.3 Kingdom have also prescribed Netherlands 6.4 -4.0 1.4 1.4 3.8 -3.0 1.6 1.7 themselves a good deal of fiscal Belgium 3.1 -3.5 1.5 1.6 belt-tightening. Even Germany, Austria Greece 2.6 -2.0 -3.7 -2.5 which is in a better fiscal position, 1.9 -7.8 1.3 1.4 announced that it will pursue a Finland Portugal 1.9 -2.6 0.3 -0.2 1%-of-GDP fiscal deficit reducIreland 1.8 -7.1 -0.7 1.0 tion each year during 2011-14 Luxembourg 0.4 -3.4 0.9 0.8 to shrink its current fiscal gap *Weights do not sum to 100% because Cyprus, Malta, Slovakia, to 1% of GDP by 2015. Al- and Slovenia were not included. though healthier fiscal accounts Forecast by TD Economics as at June 2010 are conducive to higher potential Source: IMF, national statistics agencies economic growth in the medium to long term, they undermine economic activity in the short term. A tighter fiscal stance and stubbornly high unemployment will certainly put a lid on private consumption, which will also be held back by household deleveraging and more
Quarterly Economic Forecast June 17, 2010
GROWTH OUTLOOK FOR THE G7 8
Annualized % Chg. 2009
6
2010F
2011F
4 2 0 -2 -4 -6 U.S.
Canada
Japan
Europe *
UK
Source: IMF, national statistics agencies. Forecasts by TD Economics as at June 2010, * Germany, France, Italy
stringent credit conditions across the region. Indeed, aggregate eurozone private consumption was flat during the first quarter relative to a year ago, and the outlook is for it to remain stagnant in the coming quarters. On the other hand, eurozone exports stand to benefit from the euro depreciation triggered by the region’s fiscal woes. Indeed, the common currency has lost roughly 18% of its value versus the U.S. dollar and the Japanese yen since January, and it has suffered a 7% decline vis-à-vis the British pound, the Swiss franc, and the Swedish krona. However, before becoming too optimistic over the eurozone’s newfound export competitiveness, we must remember that roughly 70% of European Union (EU) exports remain within the region, and presumably a large portion of that 70% stays within the eurozone itself, which limits the positive impact of euro depreciation on the members’ exports. To illustrate this point, Germany’s top-30 export destinations in 2009 accounted for roughly 88% of its total exports. Of those, external sales to eurozone countries accounted for roughly 42% of total German exports. And, if we include other top-30 countries such as Denmark, Romania, Hungary, and Poland, whose currencies have depreciated or remained stable vis-à-vis the euro, that figure goes up to 50% of total German exports. Therefore, the euro depreciation will only provide a boost to approximately one half of German exports. In addition, the German exports-to-GDP ratio is the largest within the euro area. Given this, the rest of the region will see a smaller growth dividend from rising export competitiveness. Thus, the positive trade impact of a weaker euro will be significant, but not enormous. Any benefit to export growth from the lower valued euro must be considered within the context of the eurozone’s high ratio
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of inter-region trade and balanced against the prospect of reduced export demand from within the region and from peripheral countries. The latter will be exacerbated by the efforts of member countries with negative current account balances, as they try to limit their reliance on external funding by curbing their consumption of imported goods. To make matters more difficult, the eurozone has a high degree of excess capacity. Industrial capacity utilization is currently at 75.5% and has only regained one third of the peak-to-trough gap since it bottomed in Q3-2009. Tepid domestic demand growth prospects will temper gross fixed investments, which at the aggregate eurozone level were still contracting on a year-ago basis during the first quarter. Against this backdrop of economic slack, inflation is expected to be contained during 2010, which combined with well-anchored inflation expectations creates leeway for monetary policy to remain accommodative for longer than previously anticipated. In all likelihood, the European Central Bank (ECB) will maintain the refi rate at 1.00% well into 2011. For some countries that rest on a stronger economic footing, like Germany, the pass-through of the euro depreciation in combination with an expansionary monetary setting will be highly supportive to their economic recovery and runs the risk of fuelling inflation during 2011. However, this would require a larger uptake in economic slack than currently foreseen. It would also necessitate strong credit growth, which appears highly unlikely. Indeed, the main risk is not strong credit flows, but rather the possibility that the ECB might need to engage in outright quantitative easing if low interest rates fail to spur lending. As we have recently witnessed with the U.S., low interest rates and monetary base expansions do not always translate MONEY AND CREDIT GROWTH 150
Index
Units
18
140 16
130 120
14
110 12
100 90
10
80 Money Supply (M1) -L-
70
8
Total Credit -L-
60
Money Velocity -R-
6
50 Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Source: U.S. Federal Reserve, TD Economics. Money velocity is defined as M1/GDP
Quarterly Economic Forecast June 17, 2010
Annualized % Chg. China
10
India
Latin America
Other Asia Ex. Japan
8 6 4 2 0 -2 -4 2009
2010 (f)
2011 (f)
Source: IMF, National Statistical Agencies, Forecasts by TD Economics as at June 2010
into credit growth. During a downturn, when the economic outlook is filled with risks, banks hoard deposits voluntarily raising their reserves. This limits lending, despite the expansion in monetary base being conducted by monetary authorities. Total lending across the eurozone declined five times during the six-month period ending February 2010. And, although it posted timid increases in March and April driven by households borrowing, the fact that credit to nonfinancial corporations is still declining remains a cause for concern. Furthermore, the ECB’s lax monetary stance will be met by financial institutions seeking to strengthen their balance sheets and reduce their leverage ratios. Uncertainty regarding upcoming changes in global financial regulations could also impede credit expansions. All of these factors will limit the impact of expansionary monetary policy on economic activity and inflation. INDUSTRIAL PRODUCTION 110
Percentage of pre-recession peak
100 90 80 70 60 50 40 Jan-05
U.S.
Germany
U.K.
Canada
Jan-06
Jan-07
Jan-08
Source: National Statistics Agencies, Central Banks
Japan
Jan-09
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3
Asia: Cruising at a remarkable pace
EMERGING MARKET GROWTH PROFILE 12
TD Economics
Jan-10
Weaker growth in Europe will translate into less dynamic Asian exports to the region. However, the EU represents roughly 15% of both Chinese and Japanese total exports. Therefore, although noticeable, the impact of a European slowdown on Asian external sales will not be large enough to threaten the Asian recovery, especially in the context of strong regional growth and a sustained North American upturn. Nonetheless, Asian economies will be on a slower economic growth path as we head into 2011. In Japan, growth was particularly strong in the first quarter, supported by a sharp rebound in exports and a fiscally-induced upturn in total consumption. Going forward, economic momentum across Asia and both North and South America will provide support for Japanese exports, although at a slower pace due to waning global inventory restocking efforts, which helped external sales in the early stages of the recovery. Export growth will face a further headwind from the recent appreciation of the yen. Meanwhile, Japanese capacity utilization is still low relative to historical averages, suggesting new investment in machinery and equipment may also remain subdued in the near term. This will combine with the expected deceleration in consumption growth caused by the winding down of fiscal stimulus to yield a moderation in economic activity. Therefore, the wings of the Japanese recovery will be clipped as we move into 2011, where we have downgraded the growth forecast to 1.6% (-40 basis points since March). China: 2010 is definitely the year of the tiger
In China, massive fiscal and monetary stimulus has kept the Chinese economy running at full throttle in recent months. During the first quarter of 2010, economic activity expanded by a brisk 11.9% Y/Y. This comes on top of last year’s 8.7% increase in Chinese GDP. Moreover, April’s external trade and industrial production figures suggest the economy keeps booming. Despite the People’s Bank of China efforts to limit lending, credit growth has only decelerated slightly. All of this has prompted us to upgrade our 2010 growth forecast for China to 9.9%. However, this figure does capture a gradual deceleration in economic activity towards the end of the year and a convergence to a more sustainable growth rate of 9% in 2011, as recent attempts by the Chinese authorities to cool down the real estate market finally bite. Furthermore, the government will likely take a more proactive stand in winding down fiscal stimulus to avoid overheating the local economy and accelerating inflation – an outcome with costly social consequences.
Quarterly Economic Forecast June 17, 2010
INDUSTRIAL PRODUCTION 110
Percentage of pre-recession peak China
Brazil
India
100 90 80 70 60 50 40 Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Source: National Statistics Agencies, Central Banks
In India, first quarter growth of 11% and increasing inflationary pressures affirm that the Indian economy is also running at full tilt. And, like their Chinese counterparts, Indian authorities have already taken steps to scale back monetary and fiscal stimulus. The central bank has raised rates twice since March, and there is every intention to continue along that path. However, the bottom line is that even though we foresee slower growth patterns in Asia, the economies of China, India and Japan will remain resilient, as they will be cooling down from exceptionally strong rates of growth. Ultimately, this bodes well for the rest of Asia, which will continue to benefit from strong capital goods and commodity exports to these countries. Sustained economic growth momentum in Asia and North America will also spill over to other emerging markets such as Latin America. These economies will benefit from robust gains in commodity exports and strong domestic demand, the latter of which has been underpinned by accommodative fiscal and monetary policies put in place at the onset of the global recession. Here too inflationary pressures may become problematic and will likely rise later this year in many of these countries. In anticipation of this, some central banks in the region have already moved off historically low interests rates (Brazil), or have indicated they are about to do so (Chile). North America: economic growth moderation appears in the horizon
The Canadian and the U.S. economies have kept climbing the recovery hill without any setbacks in recent months. The latest data suggest economic growth will be stronger in
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both countries than we had projected in our March forecast. Consequently, we have upgraded our real GDP growth estimates for 2010 to 3.6% (up 0.5pp) in Canada and 3.2% (up 0.1pp) in the United States. In the second half of 2010 and into 2011, we see a smooth slowdown in both countries. In the U.S., this will be caused by the winding down of fiscal stimulus, a modest recovery in private consumption due to a slow decline in unemployment, and a weaker contribution to growth from net exports yielded by a stronger U.S. dollar and a weaker global economy. In Canada, less fiscal stimulus will combine with slower export demand south of the border and a cooling housing market to deliver a less vigorous overall expansion. As such, we have revised our previous 2011 growth forecast downward to 2.5% for Canada (down 0.4pp) and to 2.8% for the U.S. (down 0.4pp). Details on the updated Canadian and U.S. forecasts can be found on our website at http://www.td.com/economics/forecasts.jsp . Be mindful of risks to forecasts
As usual, there are both upside and downside risks to our global forecast. On the upside, greater resilience of economic activity across Europe could help debt-laden European sovereigns temper the negative impact of fiscal consolidation and avoid the pernicious feedback loop between fiscal tightening and reduced economic growth. This, in turn, would contribute to the firming global recovery and negate the risk of a relapse. Nevertheless, we see this upside risk as a low probability event. There is also the risk that growth in Asia – China and India in particular – does not cool down as quickly as expected, and this provides a more fertile backdrop for production and export growth in many countries, especially emerging markets. However, this could be perceived as both an upside and downside risk because if these economies remain overheated, it could trigger a sharper and more disruptive deceleration down the road. For instance, a bubble burst in China’s real estate market could affect global commodity prices and weaken global economic growth. Therefore, the ability of Chinese authorities to administer a soft slowdown will not only prove critical to the social stability of the Asian region, but it is also a key element underpinning the global recovery. Still, the more detrimental and dominant downside risk to the global economy stems from potential financial disruptions triggered by Europe’s sovereign debt difficulties. Under the assumption that the joint European Union–IMF support program succeeds in addressing market concerns regarding short-term fiscal borrowing and repayment capacity of Greece, Portugal, Spain, and Italy, the recent decline
Quarterly Economic Forecast June 17, 2010
in value sustained by these countries’ debt instruments still hurts the balance sheets of the financials institutions that hold them. The risk is that, eventually, these institutions may need to increase their capital levels in an environment which is turning increasingly less supportive to their funding requirements. Ultimately, banks’ ability to extend credit could be lessened and this could be detrimental to economic growth. In an even worse scenario, one or more European governments might elect to pursue a debt restructuring despite the support of the EU-IMF program, dealing a severe blow to European banks and creating significant financial strains around the world. Concluding Remarks
The global economic outlook has two distinct groups of countries with contrasting prospects. In the one camp, emerging economies – such as China, India, and Brazil - are
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growing at above-trend speeds and facing the threat of a flare-up in inflation. This has prompted their central banks to start tightening their monetary stance. In the second camp, European countries confront very poor growth prospects caused by unavoidable fiscal retrenchment, and this will lead to disinflationary pressures. As a result, monetary policy will remain exceptionally stimulative for longer than previously anticipated throughout our forecast horizon. Between these two polar extremes lies the U.S. and Canada. Their economies have seen a firming recovery in recent months. However, both countries will experience a moderate slowdown in the coming quarters due to unwinding fiscal stimulus and a less favorable external environment. And no matter which country you look at, there will be one universal theme playing out: uncertainty regarding Europe’s sovereign debt challenges will continue to rattle financial markets, causing sporadic bouts of volatility.
Quarterly Economic Forecast
TD Economics
June 17, 2010
GLOBAL ECONOMIC OUTLOOK
ECONOMIC INDICATORS FOR THE G-7 AND EUROPE
Annual per cent change unless otherwise indicated 2007 Share* Real GDP (%) World 99.1 North America 25.5 United States 21.4 Canada 2.0 Mexico 2.1 European Union (EU-27) 23.7 Euro-zone (EU-16) 16.1 Germany 4.4 France 3.2 Italy 2.8 United Kingdom 3.3 EU accession members 3.4 Asia 35.5 Japan 6.6 Asian NIC's 3.7 Hong Kong 0.5 Korea 1.9 Singapore 0.3 Taiwan 1.1 Russia 3.2 Australia & New Zealand 1.4 Developing Asia 20.6 ASEAN-4 3.1 China 10.9 India 4.6 Central/South America 6.1 Argentina 0.8 Brazil 2.8 Other Developing 8.4
2008 2.8 0.5 0.4 0.5 1.3 0.8 0.5 1.0 0.1 -1.3 0.5 2.1 4.8 -1.2 1.5 2.2 2.2 1.1 0.1 5.6 2.1 7.4 4.7 9.0 7.3 4.7 6.8 5.1 5.5
2009 -1.0 -2.8 -2.4 -2.5 -6.6 -4.1 -4.0 -4.9 -2.5 -5.1 -4.9 -3.9 1.5 -5.2 -1.0 -2.6 0.1 -2.2 -1.9 -7.9 1.0 5.6 1.2 8.5 5.7 -0.2 0.9 -0.2 1.7
Forecast 2010 2011 4.0 3.6 3.3 2.9 3.2 2.8 3.6 2.5 3.9 3.8 1.1 1.2 0.9 1.1 1.6 2.0 1.4 1.6 0.4 0.6 1.0 1.4 2.0 1.5 6.4 5.7 2.6 1.6 5.5 4.9 5.1 4.9 5.0 4.9 6.1 5.5 6.5 4.7 4.1 3.9 3.1 3.2 8.3 7.6 4.6 4.4 9.9 9.0 8.1 7.4 4.2 3.7 3.2 3.1 6.2 4.1 4.3 4.2
*Regional wts. do not sum to 100% because some countries omitted Forecast as at June 2010 Source: International Monetary Fund, national statistical agencies
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www.td.com/economics
2008
2009
Forecast 2010 2011
Real GDP (Annual per cent change) G-7 (41.17%)* U.S. Japan EU-16 Germany France Italy United Kingdom Canada
0.1
-3.5
2.5
2.2
0.4 -1.2 0.5 1.0 0.1 -1.3 0.5 0.5
-2.4 -5.2 -4.0 -4.9 -2.5 -5.1 -4.9 -2.5
3.2 2.6 0.9 1.6 1.4 0.4 1.0 3.6
2.8 1.6 1.1 2.0 1.6 0.6 1.4 2.5
Consumer Price Index (Annual per cent change) G-7 U.S. Japan EU-16 Germany France Italy United Kingdom Canada
3.2
-0.1
1.3
1.2
3.8 1.4 3.3 2.8 3.2 3.5 3.6 2.4
-0.4 -1.4 0.3 0.2 0.1 0.8 2.2 0.3
1.7 -1.0 1.6 1.3 1.5 1.8 2.8 1.8
1.3 -0.2 1.7 1.8 1.4 1.7 1.9 1.8
Unemployment Rate (Per cent annual averages) U.S. Japan EU-16 Germany France Italy United Kingdom Canada
5.8 4.0 7.6 7.3 7.8 6.8 5.6 6.2
9.3 5.1 9.4 7.5 9.5 7.7 7.6 8.3
9.6 5.1 9.9 7.7 10.2 8.6 8.1 8.2
9.1 4.8 9.4 7.7 10.1 8.3 7.4 7.8
*Share of 2007 world gross domestic product (GDP) Forecast as at June 2010 Source: National statistical agencies, TD Economics
For detailed foreign exchange rates forecasts please refer to our June issue of Global Markets
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