Global Economic Outlook Improves a Bit: IHS

Threats that may pull down global economy are never far away, but recent data depict a brightening outlook according to IHS, a global business and economic information provider.

IHS has noted that manufacturing and nonmanufacturing activity in many key economies has picked up in January. The U.S. signposts are mostly favorable and confirm that the expansion is on track. Forward-looking data for Germany and the UK suggest that both economies can avoid recessions.

Overall, the eurozone recession is likely to be mild, ending this spring. Although China’s economy is decelerating, a soft landing remains the most likely outcome. IHS expects that global real GDP will grow marginally from 3.0 percent in 2011 to 2.7 percent this year. Yet, quarter-to-quarter growth should steadily improve as we move through 2012, leading to a global growth of 3.6 percent in 2013.

Nariman Behravesh, IHS Chief Economist, and Sara Johnson, IHS Global Insight Economist are expecting a slightly better, but still sluggish recovery in the U.S. Recent employment gains have raised hopes that the U.S. economy can achieve a virtuous circle where employment, incomes, and consumer spending advance together. Some of the improvement in economic indicators is due to mild weather and seasonal adjustment factors. Fiscal uncertainties facing the American economy after the November elections are staggering. IHS assumes that Congress and the president will take a gradualist approach to phasing out tax cuts and phasing in large spending cuts.

They also note that the condition in Europe will not be quite as bad as feared. Fourth-quarter data show that the eurozone is in recession, as real GDP declined at a 0.3 percent quarterly rate. The region's recession is expected to be mild, ending this spring. Recent monthly data on business sentiment and output suggest a quick return to modest growth in the UK and German economies. Yet, recessions in Greece, Italy, Portugal and Spain will be deeper and more protracted than previously estimated, possibly extending into early 2013. The good news is that the risk of a horrible sovereign-debt crisis in the eurozone has diminished somewhat. There is a growing sense that troubles with Greece’s debt restructuring/default will not infect Italy and Spain, where new leaders are making progress on structural reforms.

Regarding Japan, IHS points out that weak global growth and a strong yen are hurting the economy. Japan’s economy contracted at a 2.3 percent annual rate in the fourth quarter of 2011, reflecting setbacks in exports and inventory investment. IHS’s near-term forecast for Japan has been revised downward due to the surprisingly slow pace of reconstruction in the areas damaged by the March 2011 earthquake and tsunami. After a 0.9 percent decrease in 2011, real GDP is projected to rebound just 1.2 percent in 2012 and 2.1 percent in 2013.

For China, the real GDP rose 8.9 percent year-on-year in the fourth quarter, the slowest pace in nine quarters. Meanwhile, industrial production recorded a solid 12.8 percent year-on-year increase in December. Deflation in the property markets has spread, causing problems for property developers, banks and local governments dependent on land-sale revenues. The government's low-cost housing initiative could provide a key buffer, preventing a collapse in construction. All told, after rising 9.2 percent in 2011, real GDP is expected to decelerate to an 8.1 percent gain in 2012.

IHS has concluded that while there are major risks still facing the global economy, the outlook for some key economies has brightened a little, and the risks of both the U.S. and global recessions have diminished somewhat.