December
Europe holds the key to the 2012 Outlook
Europe remains the key to what the year holds for financial markets and the global economy. Our base case scenario is that Europe is in recession next year, but manages to avoid a systemic collapse in its financial system and break-up of the single currency. However, the chances of such a worst- case scenario are no longer negligible, and we estimate them to be around 20%.
November
The US economy has overcome the shocks of last spring…
Earlier this year the global economy was shocked by oil prices above $100 per barrel during the Arab spring and supply-chain disruptions from Japan’s devastating earthquake. The shock was sufficient to cause negative surprises in activity data for five months from May to September, triggering widespread fears of a double dip back into recession. However, since the middle of October, US data has come in ahead of the market’s lowered expectations.
October
Developed economies are hardly growing at all, making them vulnerable to recession
In a de-leveraging economy slow growth is the best that can be hoped for, but signs are mounting that the global economy is on the verge of a synchronised recession. The Organisation of Economic Cooperation & Development’s leading indicators have rolled over across the globe, and the global whole-economy purchasing managers’ index (PMI) is signalling that growth has fallen to an anaemic pace. The US manufacturing PMI is signalling a 50% chance of recession and the Ifo survey of German business sentiment suggests a euro-zone recession lies ahead.
September
Rising recession risk is not sufficiently priced in to equities to be sure they have bottomed
Recent economic data for the US, China, Europe and the UK show a rising risk of recession. In the absence of dramatic policy action, a recession is a high probability outcome that is not yet sufficiently priced into equity markets to be certain that they have found a bottom. In contrast, we believe that a recession is fully priced into government bond markets.
August
Multi-year deleveraging process will keep growth slower, more fragile
The process of deleveraging the consumer, financial and public sectors means that for a multiyear period growth in developed economies, which make up 60% of global GDP, will be lower and more fragile than in the era before the global financial crisis. While these risks have escalated at a surprising speed in recent weeks, we have been aware of them for some time and have already made a great deal of structural changes in our portfolios accordingly.
July
Disappointment of the past few months to give way to a reacceleration in US growth
Since the trend of disappointing US economic data began in late April and the Greek debt crisis started to escalate, equity markets have fallen as much as 7% and bonds have rallied. During the second half of the year, the US economy is likely to reaccelerate thanks to a combination of lower oil prices and a restarting of the Japanese supply chain, which should be particularly beneficial for the auto and information technology industries.
June
Equities dealt a setback by euro-zone procrastination and economic impact of oil price spike
After a strong April, which saw the US market hit a new high for the year and many other markets touch or exceed February’s two-year high, equities sold off modestly during May and June is off to a weak start. This was the result of Europe’s policy-makers continuing to procrastinate over additional aid to Greece and the 25% rise in the oil price seen in the first four months of the year also started to show through in economic data.
May
Don’t be deceived by appearances of sharp loss of momentum in the US economy
Although the US economic recovery has lost some steam in recent weeks, some of the highfrequency data is exaggerating the loss of momentum due to problems with stormy weather and seasonal adjustments. The underlying picture is one of an increasingly selfsustaining recovery that will support rising equity prices and narrow spreads between corporate and government bond yields, while gradually pushing up the latter.
April
The global economy is growing at its fastest pace since 2006
Coincident economic indicators suggest the global economy is growing more quickly than envisaged in the central scenario of our 2011 Outlook. Purchasing managers’ surveys (PMIs) are signalling that global growth is currently running at an annualised pace of around 4.5%, the fastest growth seen since 2006. Despite lingering concerns about a jobless US recovery, weekly initial unemployment claims and PMIs suggest that it is only a matter of time before payrolls shift up a gear from the anaemic 100,000 a month increase averaged over the past year.
March
The most recent phase of the global recovery has been led by the developed economies
After slowing slightly in the first half of 2010, annualised global growth has accelerated to around 4%, a pace not seen since 2006, reflecting a broadening recovery in the developed economies to encompass smaller companies, business investment, the labour market and credit demand. By contrast, leading indicators suggest that Asian and emerging economies will cool in response to tightening monetary policy. However, a further material rise in the oil price, if sustained, would threaten to derail the global recovery. Each $10 rise in the oil price will reduce 2012 GDP by around 0.2 percentage points.
February
US stimulus adds to positive data surprises to lift our expectations for US GDP growth
New US fiscal stimulus plans passed late last year mean that US GDP growth is likely to be around 3.5% in 2011, up from our previous estimate
of 2.5% and well above the current consensus forecast of 2.7%. Even prior to this good news, economic surprises in the major economies had turned positive after a disappointing summer.
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January
2011 to be another positive year for risk assets as the global economy continues to heal, but broad double-digit returns are unlikely
We expect 2011 to be another positive year for risk assets as the global economy continues to heal, although a repeat performance of 2010 to date, with high-single or double-digit returns from most asset classes, seems unlikely.
Developed-economy consumers and governments will maintain their focus on reducing debt, keeping growth slower than in the pre-crisis years and reliant on corporate spending and exports. Consumers and banks are about halfway through their deleveraging, while governments are just beginning this multi-year process.
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