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: email@example.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: firstname.lastname@example.org 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 This report is provided by TD Economics for customers of TD Bank Financial Group. 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