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					                                    Quarterly Economic Forecast                                 TD Economics
                                                                                                www.td.com/economics

                                             September 16, 2010

           HIGHLIGHTS
                                         GLOBAL ECONOMIC OUTLOOK: SHIFTING DOWN A
•   The global recovery continues            GEAR AFTER POST-RECESSION SURGE
    to be a story of two economies
    – robust strength in emerging
                                             The global recovery continues to be a story of two economies – robust strength
    markets but fragile and tenta-
    tive economic growth through
                                         in emerging markets; but, fragile and tentative economic growth through much of
    much of the industrialized           the industrialized world. In recent months, the largest developing economies have
    world.                               maintained above trend economic growth, which has prompted a dose of policy
                                         tightening to preempt the risk of overheating or the creation of asset bubbles.
•   Recent U.S. macroeconomic
                                         Meanwhile, after a more subdued rebound in economic activity, most advanced
    indicators have been signaling
    a slower recovery than what we       economies have recently recorded softer economic indicators, which suggest that
    previously expected, which has       the post-contraction inventory surge and fiscally-fuelled rebound have started to
    prompted us to introduce a sig-      wane. In all, this indicates economic gains over the next two years will be secured
    nificant 0.9- percentage- point       with shorter steps.
    downward revision to our 2011            There are two key elements to the large and widening growth gap between
    forecast.                            the emerging markets and the industrialized world. First, there is the ever present
•   In terms of the global economy,      structural factors: faster population growth and greater scope for gains in output per
    the effect of a downgrade to our     worker from increased investment in capital and new technologies naturally imply
    U.S. growth outlook is more          faster economic growth rates for developing economies vis-à-vis more mature ones.
    than offset by stronger perfor-      Second, there are key cyclical factors at the moment. Most advanced economies in
    mances in China, India, Brazil,      the latest recession experienced a financial crisis, whereas the downturn to emerging
    alongside relatively unchanged       markets was transmitted mostly through international trade channels. History shows
    economic projections for Eu-         that recessions induced by a financial crisis are much more damaging and take longer
    rope and Japan.                      to heal. Hence, it is no
•   Enormous uncertainty remains         surprise that advanced
    over future economic condi-                                           EUROPE CONTRIBUTIONS TO GDP GROWTH
                                         economies fell harder
    tions. While upside risks are        and are now climbing                 Priv Cons         Gov Cons            Fixed Invest
    present, downside risks are          out of the recession                 Inventories       Net Exp             GDP
    more numerous and of higher
                                         at a gradual and pro-         6%
    probability. Nevertheless, the
                                         tracted pace, which is
    most likely outcome is contin-                                     4%
    ued moderate global growth.
                                         a third of the speed of
                                         developing countries.         2%

                                             Looking ahead,            0%
                                         the theme of relative        -2%
                                         structural and cyclical
Beata Caranci                                                         -4%
  AVP and Deputy Chief Economist,
                                         strength in the emerg-
  416-982-8067
                                         ing market world will        -6%
                                                                         Q1:04     Q1:05  Q1:06 Q1:07    Q1:08 Q1:09    Q1:10
  mailto: beata.caranci@td.com           remain part of the
                                         global landscape for Source: TD Economics based on Eurostat data
                                         many years. However,
Martin Schwerdtfeger                     it should be stressed that, amidst a deceleration in advanced economies, the nature
   Economist, International              of the global supply chain and the globalization of the world economy will also
  416-982-2559                           restrain the strength of emerging markets. This, combined with further policy ef-
   mailto: martin.schwerdtfeger@td.com   forts to check excessive price growth, suggest that the pace of emerging market
                                         growth has likely peaked.
                                             In terms of revisions to the TD Economics’ global outlook, recent U.S. macro-
                                                Quarterly Economic Forecast                            TD Economics                          2
                                                            September 16, 2010                         www.td.com/economics


economic indicators have been signaling a slower recovery
than what we previously expected, which has prompted us                     EURO ZONE CONTRIBUTIONS TO GDP GROWTH

to introduce a significant 0.9-percentage-point downward                          Priv Cons             Gov Cons               Fixed Invest
revision to our 2011 forecast for this economy. In terms of                      Inventories           Net Exp                GDP
the global economy, the effect of a downgrade to our U.S.              6%

growth outlook is more than offset by stronger performances            4%
in China, India, Brazil, alongside relatively unchanged eco-
                                                                       2%
nomic projections for Europe and Japan. As a result, global
economic growth for the current year is expected to come in            0%

at a 4.2% pace (up 0.2% from our June forecast), slowing              -2%
to 3.6% in 2011. The main theme is that both advanced and
                                                                      -4%
developing nations rebounded (albeit at very different rates)
from the 2008/09 recession, but now both will experience              -6%
                                                                         Q1:04      Q1:05      Q1:06   Q1:07     Q1:08   Q1:09      Q1:10
some moderation in 2011. We have now added a 2012
outlook, and the projection is for global economic growth            Source: TD Economics based on Eurostat data
of 3.7% – this reflects a relatively stronger performance in
North America that offsets somewhat slower, but still strong,      by half a percentage point since our June forecast to 1.5%,
economic growth in emerging markets.                               largely to reflect the stronger-than-expected outturn in the
                                                                   second quarter. However, as stressed above, the recent spurt
Europe: a long healing process
                                                                   of economic strength in the euro zone has not changed the
    Turning to the regional economic details, Europe showed        outlook in any meaningful way for 2011. Many of these
a stronger-than-expected growth performance in the second          countries still face a great deal of fiscal belt tightening that
quarter, particularly reflecting a surge in German GDP.             will bite into economic growth in 2011 and 2012. Mean-
However, one quarter does not make a trend and the Euro-           while, the recent build-up of inventory levels does not leave
pean situation remains dire, especially on the fiscal front.        much room for this component to offer a repeat performance
    The euro zone economy grew 1.9% y/y in the second              to growth in 2011, while the expected deceleration in global
quarter, driven by a rebuilding in inventories and by positive     demand will affect euro zone exports. Consequently, we
contributions from both private and public consumption.            see growth at 1.4% in 2011, which is little changed from
However, the lift to economic activity from the inventory          our June forecast.
build-up in recent quarters has run its course. As a result,           Against the backdrop of modest economic growth, rela-
consumption and fixed investment will need to carry a               tively low capacity utilization rates and a soft labor market,
greater burden in driving the recovery, despite the head-          we anticipate the European central bank (ECB) will maintain
winds imposed by still high unemployment and low capacity          its expansionary policy stance this year and throughout
utilization rates. Regrettably, a surge in consumption and         2011. The lackluster performance of continental Europe
investment does not appear in the offing. The best that can         will also likely result in a material further weakening of
be expected is that these two components make a moderately         the euro in 2011.
positive contribution as the recovery progresses. The gradual
                                                                   North America: a leaner recovery lies ahead
normalization of credit markets should prove supportive.
Indeed, at the euro zone level, total credit to the private sec-       In this multi-speed global economy, the U.S. is definitely
tor has been accelerating in annual terms over the last four       driving in second gear, while Canada also looks to be down-
months of available data – April to July – with households         shifting. In fact, the most significant downward revisions
and financial institutions driving the upturn. So, modest to        to our growth forecast took place in these economies. Over
moderate private demand growth seems likely. Meanwhile,            the last three months there has been a softening in the U.S.
exports are also unlikely to fuel robust European growth.          recovery, the most salient features of which are the very
Although a weaker euro has made euro zone exports more             weak upturn in job creation and the deceleration of economic
competitive, the added edge will be offset by both slower          activity in the second quarter. In turn, this weaker U.S.
European and global demand.                                        economic outlook translates into lower growth in Canadian
    Putting all of the pieces together for 2010, we have           exports. Consequently, we have downgraded our real GDP
upgraded our economic growth forecast for the euro area            growth estimates for 2010 to 2.6% (down 0.6%) in the
                                                       Quarterly Economic Forecast                                  TD Economics                           3
                                                                          September 16, 2010                        www.td.com/economics



         U.S. CONTRIBUTIONS TO GDP GROWTH                                                   JAPAN CONTRIBUTIONS TO GDP GROWTH
          Priv Cons              Gov Cons                  Fixed Invest                       Priv Cons             Gov Cons                Fixed Invest

          Inventories            Net Exp                   GDP                                Inventories           Net Exp                 GDP
   6%
                                                                                     6%

   4%                                                                                4%
                                                                                     2%
   2%
                                                                                     0%
   0%                                                                               -2%
                                                                                    -4%
  -2%
                                                                                    -6%
  -4%                                                                               -8%
                                                                                   -10%
  -6%
                                                                                          Q1:04    Q1:05    Q1:06   Q1:07      Q1:08   Q1:09    Q1:10
     Q1:04     Q1:05    Q1:06   Q1:07      Q1:08   Q1:09      Q1:10
                                                                                   Source: TD Economics based on data from Economic & Social Research
 Source: TD Economics based on U.S. BEA data                                       Institute, Japan Cabinet Office


United States and 3.0% (down 0.6%) in Canada. Towards                            by 0.2% this year to 2.8%, reflecting the larger impact on
the end of 2010 and into 2011, we see a further slowdown                         Japanese exports from the stronger economic growth out-
in both countries. In the U.S., this will be caused by the                       look for the Asia region. In turn, our 2011 forecast remains
winding down of fiscal stimulus, a negative contribution                          in line with our June forecast, with the Japanese economy
to growth from net exports and a very modest increase in                         expected to decelerate to below 2% growth, as momentum
household spending. In Canada, the slowdown in export                            from the prior year is lost.
demand will combine with a financially burdened consumer
                                                                                 Emerging markets will continue to outperform
that lacks any pent up demand to deliver a more subdued                          advanced economies
overall expansion. A continued correction in real estate will
also present a bit of a challenge for the Canadian economy.                          China has spearheaded the solid run of emerging markets
In line with this outlook, we have revised our previous 2011                     since last year, and its economy remains buoyant, although
growth forecast downward to 1.9% for the U.S. (down                              it is showing some signs of slowing. Chinese real GDP
0.9%) and to 2.0% for Canada (down 0.4%). For a detailed                         grew by 11.1% during the first half of 2010, and it is set to
analysis, our latest U.S. and Canadian forecasts can be found                    end the year with an expansion above 10%. The restric-
at http://www.td.com/economics/forecasts.jsp.                                    tions imposed by Chinese authorities in April to cool down
                                                                                 real estate activity have yielded a moderate deceleration in
Japan wrestles with deflation                                                     housing prices, but investments in real estate developments
    The strong rebound in global trade since the second half                     were still growing by a robust 34.7% y/y in July.
of last year has played in Japan’s favor. However, following                         Furthermore, although total credit growth has also
a sharp increase during the first quarter, economic activity                      decelerated in response to tighter lending requirements,
slowed down during April - June due to weaker net exports                        the 20% y/y expansion during the second quarter was not
and private consumption, as well as a large drawdown in                          slow, especially if we take into consideration that it comes
inventories. In the coming quarters, economic growth will                        on top of last year’s 31% increase in total lending. In line
be tempered by several factors. An unemployment rate of                          with burgeoning economic and monetary conditions, the
5.2%, which is high by Japanese standards, will continue                         latest reckoning of consumer prices also showed a rise in
to pose a drag on private consumption. Moreover, net                             Chinese annual inflation to above 3.1% in July. Therefore,
exports are expected to remain the main growth driver this                       nothing seems to indicate the Chinese economy is headed
year, but the moderate slowdown in Japan’s main trading                          to a government-induced abrupt slowdown. Indeed, the
partners and the recent appreciation of the Japanese yen –                       slowing that is being engineered by policy-makers seems
the currency is up 11% vis-à-vis the U.S. dollar since early                     prudent to temper asset price growth and the threat of infla-
May – will yield a deceleration in export growth. Taking                         tion. Accordingly, there is little change to our 2010 growth
all these elements into account, we have slightly increased                      forecast (with a modest 0.3% increase that reflects slightly
our economic growth forecast for the Japanese economy                            stronger growth reported in recent quarters) and economic
                                                          Quarterly Economic Forecast                            TD Economics                  4
                                                                            September 16, 2010                   www.td.com/economics


                                                                                   surprises at a global scale are very limited in number and of
          CHINA CONTRIBUTIONS TO GDP GROWTH
                                                                                   lower probability, whereas downside risks are not only more
           Priv Cons                Gov Cons                 Fixed Invest          numerous, but also carry a higher probability.
           Inventories              Net Exp                  GDP                       A sharper deceleration in economic activity than we are
    20%                                                                            currently forecasting either in the U.S. or in Europe con-
                                                                                   stitutes a downside risk to our forecast, not only because
    15%
                                                                                   of its direct domestic or regional effects, but also because
    10%                                                                            of its negative implications for investments in, and exports
     5%                                                                            from, emerging markets, that would be curtailed due to
     0%
                                                                                   the dimmer global demand prospects. Moreover, if the
                                                                                   ongoing recovery in these economies were to be perceived
    -5%
                                                                                   as more feeble than it actually is, this could have material
   -10%                                                                            implications by generating more pessimistic consumer and
          1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
                                                                                   business expectations at a global level, thus affecting private
  Source: TD Economics based on China National Bureau of Statistics data           spending and investments. At the other end of the spectrum,
                                                                                   an overheating in some emerging markets would also pose
growth in 2011 is expected to come in at a softer, but still                       a risk. For example, a stumbling of the Chinese economy
robust, 9.3%.                                                                      would have global reverberations through trade, investment
    Economic growth in other emerging markets has also                             and commodity prices.
held at very high speeds, pushing central banks into tight-                            However, the number one threat to global growth con-
ening mode. In India, the economic expansion acceler-                              tinues to be the sovereign debt situation of some European
ated from 8.6% y/y in the first quarter to 8.8% y/y during                          nations and its possible implications for financial markets
April-June driven by strong investments and consumption.                           stability. On 23 July, the Committee of European Banking
Booming economic activity and a severe drought had fueled                          Supervisors published the results of stress test carried out on
inflation earlier this year. Despite the efforts of the Indian                      91 European banks. Although the test design was regarded
central bank, which raised the policy interest rate by a full                      as too lenient, the very low fail rate – only six banks ap-
percentage point during the March - July period, inflation                          peared to have low capital levels under the test assumptions
remained high at around 10%. Changes in monetary policy                            – brought some relative calm to global financial markets.
impact the economy with a sizeable lag, so the recent rate                         However, this did not mean that sovereign debt difficulties
hikes will have a greater effect in coming quarters, but at                        were put to rest in the euro zone. We have stated repeatedly
4.5% the policy interest rate is still low and remains stimu-                      that the efforts at fiscal consolidation will last several years
lative to India’s economy, suggesting that further policy                          and in the meantime high debt-to-GDP ratios will pose a
tightening is likely to come.                                                      risk to the financial stability of these countries. As such,
    Growth in Latin America has also been stronger than                            any negative development involving a euro zone sovereign
previously anticipated, boosted by solid private consumption                       could impact financial markets. For example, when Ireland
and fixed investments in the main countries of the region.                          announced on 8 September that it will restructure Anglo
The Brazilian economy, in particular, has been growing at                          Irish Bank into two separate institutions in an attempt to stop
around 9% so far this year, and we expect this momentum                            the bank loses and to prevent a run on its deposits, the euro
to carry forward to next year.                                                     suddenly lost ground vis-à-vis its main trading partners and
                                                                                   the country saw a sharp increase in its interest rate spreads.
Risks to the forecast
                                                                                   Episodes like this will be the norm rather than the excep-
   So, the main theme to the global outlook is a continuation                      tion for some time to come. The main issue, and risk, is
of economic growth, with emerging markets in the expan-                            whether the fiscal and financial consolidation will proceed
sion phase of the business cycle but with most industrialized                      smoothly, or whether a renewed financial crisis rears its
nations still in the recovery stage. The main sources of risks                     ugly head. The latter is not the most likely scenario, but it
to our forecast have not fundamentally changed since our                           warrants close monitoring.
previous quarterly release. At this juncture it is still fair to                       On the upside, a marked improvement in U.S. business
say that the elements which could cause pleasant economic                          and consumer sentiment and/or a sharp increase in U.S. cred-
                                               Quarterly Economic Forecast                     TD Economics                  5
                                                           September 16, 2010                  www.td.com/economics



it flows could propel business investments and household           years, and make them more vulnerable to future shocks. This
consumption and improve labor market conditions, yielding         is particularly the case for a number of European nations,
much stronger output gains than we currently forecast. And,       which will struggle to grow under the burden of oversized
there is the possibility that Europe might surprise us with       sovereign debts. However, it is also very important to keep
respect to its resiliency. At the end of the day, the fact that   in mind two things about this recovery. First, nobody said
there are both upside and downside risks to the forecast,         – or even dreamed – it was going to be a fast one. Second,
make us comfortable with the base case outlook.                   despite all the difficulties, we keep moving in the right di-
                                                                  rection. These two elements should set the stage for sober,
Concluding Remarks
                                                                  but realistic, expectations. If we come to terms with the fact
   The bottom line is that these are very uncertain eco-          that advanced economies will grow very timidly for several
nomic times. There are plentiful risks, and it is extremely       years and also that emerging markets will continue to run
important to watch them closely. Painful balance-sheet            at a fast but slowing clip, providing an ever larger engine
adjustments in both public and private domains will limit         for global growth, then we will have found firmer ground
economic growth in advanced economies for a number of             for cautious optimism.
                                                   Quarterly Economic Forecast                            TD Economics                      6
                                                                September 16, 2010                        www.td.com/economics




            GLOBAL ECONOMIC OUTLOOK                                          ECONOMIC INDICATORS FOR THE G-7 AND EUROPE
        Annual per cent change unless otherwise indicated                                                                 Forecast
                   2007 Share*                   Forecast                                              2009       2010      2011     2012
Real GDP                   (%)      2009    2010 2011       2012                            Real GDP (Annual per cent change)
World                     99.1      -1.1     4.2   3.6      3.7             G-7 (41.17%)*              -3.6       2.4        1.8     2.1
North America             25.5      -2.9     2.8   2.0      2.7
                                                                              U.S.                     -2.6       2.6        1.9     2.6
 United States            21.4      -2.6     2.6   1.9      2.6
                                                                              Japan                    -5.2       2.8        1.8     1.6
 Canada                    2.0      -2.5     3.0   2.0      2.8
                                                                              EU-16                    -4.0       1.5        1.4     1.3
 Mexico                    2.1      -6.6     4.1   3.8      4.2                 Germany                -4.9       2.4        2.2     1.8
European Union (EU-27)    23.7      -4.1     1.6   1.5      1.4                 France                 -2.5       1.5        1.4     1.5
 Euro-zone (EU-16)        16.1      -4.0     1.5   1.4      1.3                 Italy                  -5.1       0.9        0.8     0.9
     Germany               4.4      -4.9     2.4   2.2      1.8               United Kingdom           -4.9       1.3        1.5     1.6
     France                3.2      -2.5     1.5   1.4      1.5               Canada                   -2.5       3.0        2.0     2.8
     Italy                 2.8      -5.1     0.9   0.8      0.9
                                                                                    Consumer Price Index (Annual per cent change)
 United Kingdom            3.3      -4.9     1.3   1.5      1.6
 EU accession members      3.4      -3.9     2.1   1.8      1.7             G-7                        -0.1       1.2        1.1     1.4
Asia                      35.5      1.5      6.8   6.0      5.7               U.S.                     -0.4       1.5       1.1      1.6
 Japan                     6.6      -5.2     2.8   1.8      1.6               Japan                    -1.4       -1.0      -0.2     0.2
 Asian NIC's               3.7      -1.0     6.4   4.8      4.4               EU-16                    0.3        1.5       1.7      1.8
     Hong Kong             0.5      -2.6     5.9   4.3      4.0                 Germany                0.2        1.3       1.6      1.8
     Korea                 1.9       0.1     5.6   4.9      4.6                 France                 0.1        1.5        1.4     1.6
     Singapore             0.3      -2.2     8.5   5.0      4.7                 Italy                   0.8        1.5       1.6     1.8
     Taiwan                1.1      -1.9     7.5   4.7      4.4               United Kingdom           2.2        3.1       2.1      1.9
                                                                              Canada                   0.3        1.7       1.8      1.8
 Russia                    3.2      -7.9     4.2   3.9      3.8
 Australia & New Zealand   1.4      1.0      3.1   3.5      3.2                     Unemployment Rate (Per cent annual averages)
 Developing Asia          20.6      5.6      8.8   8.0      7.6               U.S.                     9.3         9.7       9.7     9.6
     ASEAN-4               3.1       1.2     6.0   5.1      4.6               Japan                    5.1         5.1       4.8     4.5
     China                10.9       8.5    10.2   9.3      9.0               EU-16                    9.4         9.7       9.1     8.6
     India                 4.6       5.7     8.9   8.0      7.4                 Germany                7.5         7.1       7.2     7.2
Central/South America      6.1      -0.2     5.4   4.6      4.5                 France                 9.5        10.0       9.9     9.8
 Argentina                 0.8      0.9      5.0   4.0      4.0                 Italy                  7.7         8.6       8.4     8.1
 Brazil                    2.8      -0.2     8.1   5.8      5.5               United Kingdom           7.6         7.9       7.6     7.3
Other Developing           8.4      1.7      4.3   4.2      4.0               Canada                   8.3         8.1       7.9     7.4
*Regional wts. do not sum to 100% because some countries omitted            *Share of 2007 world gross domestic product (GDP)
Forecast as at September 2010                                               Forecast as at September 2010
Source: International Monetary Fund, national statistical agencies          Source: National statistical agencies, TD Economics




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