Shift in sentiment, but risks remain
United States
We continue to look for moderate 2012 GDP growth, despite the strong contribution of inventories to Q4 2011 GDP. The continued recovery in survey and jobs data, in the small business sector and in C&I lending provide us with good reason to believe the recovery will steam ahead. Loose Fed policy should provide a further foothold to growth, although we see the Fed tightening policy before the late-2014 timing it signalled in its latest policy statement. A blow out in the Euro crisis remains an ongoing threat to growth, as does a further spike in oil prices, but for now these risks look to be contained. The key longer-term risk lies in domestic politics; if President Obama is re-elected he may find he faces two hostile houses of Congress next year, increasing the potential for policy gridlock.
United Kingdom
Despite a 0.2% decline in UK GDP in Q4, monthly official and survey data point to a recovery in activity. We feel justified in taking the unusual step of upgrading our GDP forecasts to +1.0% for this year (from +0.4%) and +1.9% for next (+1.8% previously). Our work rejects the view expressed by some that the strengthening in many indicators reflects disruption to seasonal adjustment factors, caused by the extent of the downturn in late-2008/early-2009. Q: When is £325bn not £325bn? A: When it is the BoE’s QE target. Even if our forecast for a subsequent £50bn of QE in May is met, the Bank would not hold £375bn of assets, as it does not reinvest the proceeds of maturing paper. The pace of ‘asset attrition’ steps up a gear early next year on the redemption of the first of its gilt holdings. We have not seen fit to make radical changes to our sterling forecasts – we still see euro:sterling at 84p at end-year and 78p at end-2013.
Eurozone
The Euro area economy contracted by 0.3% in Q4, a touch less than we expected. Helped by the ECB’s 3y LTRO, general sentiment has improved, with some signs that activity is stabilising. While the second Greek bailout has averted a potential Armageddon scenario, it is notable that official forecasts of Greece’s debt sustainability can be consigned to the waste bin once key assumptions are varied. So far, Greek GDP has slumped by 16%, compared with a peak to trough fall in US GDP of 29.5% in the 1930’s Depression. We note that opinion polls show a sharp rise in the far left parties’ share of the vote, which presents a clear political risk ahead of, and perhaps after, elections planned for April. We stand by our longer-term forecast that the euro is set to fall to USD 1.20 by end-2013.
Global
Since the turn of the year, signs have pointed towards a better global growth outlook for 2012, with the global PMI having jumped to an 8 month high in January. The IMF is forecasting a respectable global growth rate of 3.3% this year with weakness in the Euro area offset by firm Emerging Market (EM) expansion. We support this outlook, but we also hold a brighter view of the US economy, such that our forecast stands at 3.7%. Ultra-loose monetary policy, by historic standards, across much of the developed world, should support the footing of global recovery. Further, if the BoJ is to push inflation towards its new 1% goal, we can expect further policy easing, with a weaker yen likely to follow.
