The following report is written by staff at the EIU and is carried in its entirety by That's Business for the benefit of our readers:-
The Economist Intelligence Unit has reduced its 2012 GDP forecast for the euro zone. We now expect the economy to contract by 0.3% compared with our previous forecast of growth of 0.8%. The debt crisis in the euro zone periphery shows little sign of prompt resolution, despite greater efforts from political leaders in recent weeks. Stress on euro zone banks is deepening; a much-discussed bank recapitalisation, if it happens, will be positive for sentiment, but it is likely to be a contentious process. Most euro zone economic indicators have turned negative, and a recession seems inevitable.
• We have also lowered our forecast for US economic growth in 2012 to 1.3% (from 2% previously). Contagion effects from the euro zone crisis, mainly on US financial markets and banks, will curb business investment and consumer spending. We now expect only some elements of Barack Obama's jobs plan, which would have been supportive for the economy, to be enacted. Unlike in the euro zone, though, most US economic indicators remain mildly positive, suggesting a measure of resilience by consumers in the face of severe economic shocks.
• Following on from our downgrades to euro zone and US economic growth next year, we have also reduced our growth forecasts for most emerging markets. Countries with significant trade exposure to the large Western economies will feel the greatest impact. We have lowered our 2012 GDP growth forecast for China to 8.2% (from 8.6% previously). China's government has the motivation and the means to stimulate the domestic economy if external demand falls too sharply.
• Asset markets continue to veer almost daily from a risk-tolerant to a risk-averse posture, based largely on developments in the euro zone, but also on economic data, especially from the US and China. Our forecast for slower growth in most countries next year implies a strengthening of safe-haven assets, such as the US dollar and developed-country bonds, and a weaker performance for risk-related assets, including equities, commodities and commodity-related currencies.
Global Economic Forecast, November 2011 is available to download, for free, at http://gfs.eiu.com