EIU Global Forecast: Double Dip Only 30% Likely

From time to time, Morningstar publishes articles from third party contributors under our "Perspectives" banner. If you are interested in Morningstar featuring your content, please contact Online Editor Holly Cook (holly.cook@morningstar.com). In this video, Robin Bew, Editorial Director and Chief Economist at the Economist Intelligence Unit, says they ascribe a 30% chance of the global economy experiencing a double dip recession as the corporate outlook looks too strong for this scenario. However, with consolidation on the part of fiscal authorities and monetary policy set to support this, Bew believes interest rates are likely to stay on hold until 2012.

Tony McMahon: Hello and welcome to the Global Forecast from the Economist Intelligence Unit. My name is Tony McMahon and as ever I'm joined by Robin Bew.

Now Robin, over the summer the data seems to be pointing to a softening in the global economic recovery.

Robin Bew: Yes, that's right. It doesn't come as a huge surprise to us although I can see from the way the markets are reacting it is surprising some analysts.

Clearly, there was an enormous amount of stimulus put into particularly the developed world but also some of the emerging markets over the course of the last 18 months or so by policymakers, monetary stimulus and fiscal stimulus and that's starting to be withdrawn, or at least, there is no additional money coming down the pipe and as a result of that, we're seeing growth slow and we had expected this.

For many markets our forecasts for 2011 were lower than 2010 already, but the data, of course, is coming as a disappointment to some and you're seeing volatility in the financial markets as a result.

So no need to panic. It is as we expected, but nonetheless, I guess disappointing to a lot of investors.

McMahon: You've attached a 30% probability to a double dip scenario?

Bew: Yes, I guess a lot of clients are saying to us 'isn't it higher than that?' They're worried about the inevitability of a new recession in America and in Europe and we think that's going a bit too far. There is still strength in the underlying economy, particularly if you look at what's going in the corporate sector. Companies are sitting on big cash piles, profitability has returned and you can see that coming through in the quarterly profitability announcements.

Now there are clearly areas of weakness. The consumers are looking weak in most of the development markets. Governments are, clearly, somewhat on the sidelines relative to where they have been in the last couple of years.

But it will be surprising to get another recession of the sort that we saw before because corporates would have to start cutting back very significantly and their financial situation looks too good for that. But slower growth? Absolutely, that's a racing certainty.

McMahon: All of this pushes back likely rate rises in the US, UK and Japan to the year after next.

Bew: Yes. We think monetary policy will be on the sidelines for a long time and if you think about what's going on right now, governments are starting to think through the fiscal stresses that they're experiencing. Most obviously in the UK, but in other markets too you're seeing a reluctance at least to put additional stimulus into the economy.

In the US, Congress has just approved a very small package, but the mood music there is also quite negative towards more government spending.

So as a result, the story going forwards is going to be consolidation on the part of fiscal authorities. Some countries quickly, other countries more slowly, but we think monetary policy will have to be supported because of that.

So interest rates will stay low in part because governments are trying to cut back in terms of tax and spend.

McMahon: So what about growth in China? Are you holding firm on your recent predictions?

Bew: Our prediction for this year is pretty strong; just shy of 10% growth and we've long had a [forecast of a] slowdown next year in China as we've had in America and Europe.

China, of course, had a very big fiscal package too. It's important to remember that it's not just Europe and the States where government stepped in to prop up growth. They did it in China too and they did it very aggressively. That's also coming to an end.

But on top of that, and I think this is very important, in China they're worried about inflation, they're worried about the pace of bank lending and they stepped on the brakes actually quite hard and that's going to slow growth later this year and into 2011.

Again, I think the stories of a crash are over-played. Government is quite capable of easing up on the brake and actually putting their foot back on the accelerator if they had to. But nonetheless, when you look at what the Government is doing right now, they're worried about bank lending. They're slowing that down and that's going to crimp growth. So weaker growth for China next year but nothing too disastrous.

McMahon: German export growth has been robust, but the eurozone isn't without some deep-seated problems. What's your prognosis for the region?

Bew: When you look at what's going on with Germany, growth there of exports particularly strong into emerging Asia, obviously China, so they've done very well there. And we're seeing slightly stronger domestic demand growth as well and that is a bit of a surprise to us because it looks like consumers are spending a bit more than was expected and we weren't really banking on that happening. So Germany looks pretty strong.

In fact, in many ways, it's Germany returning to the story pre-crisis of an export-driven economy which is doing very well. But I think you do have to put it in context: while China is buying a lot of German goods right now, it's pretty clear the rest of the eurozone is not and that is going to crimp their prospects going forwards to some extent.

But it's not really Germany that we're worried about. It's the other countries in Europe, particularly the peripheral ones where things do look pretty bleak. I mean if you look to Greece and Portugal, things there are going to be very difficult. Tough in Italy, tough in Spain and that will hold the eurozone as a whole back.

McMahon: Turning to the new coalition government in the UK, it has certainly set a new benchmark for austerity, but do you think that others are likely to follow?

Bew: Well they've certainly set a benchmark for austerity. I'm not sure everyone else around the world has really noticed. In the UK we tend to be very focused on what's happening in terms of policy. It's not so clear to me that America has cottoned on to this, or even Continental Europe.

But it is absolutely clear that the coalition government has announced a strategy - obviously we've yet to see it put into effect - of bringing the fiscal deficit down in a very aggressive way and most of those cuts occurring through spending rather than through higher taxes and they've absolutely thrown down the marker of one possible route to doing this. We need to see how it will be achieved in practice and obviously we will know a lot more as we get into October and then as they try enact some of this next year.

But it is important to recognise that while the UK fiscal position is pretty dire, they're hardly the only country in the developed world with a dire fiscal position.

Other developed nations in Europe and in the States are going to have to follow some kind of fiscal consolidation path. The UK has shown one way of doing it. It will be interesting to see whether other countries decide to go down that road or another one.

McMahon: Thank you, Robin. Well join us next month for more analysis of the world economy on the Global Forecast. Until then, thank you and goodbye.

This video was supplied by Cantos.