Current fears of a global recession
are excessive - Northern Bank

Despite the ongoing European debt crisis, 2012 will be a year of improvement for the global economy, according to a new report published by Northern Bank today.

Northern Bank's latest Global Scenarios report says that despite the downbeat sentiment that currently prevails, the global economy is heading in the right direction.  The recession in the euro area should be short, the US economy is showing signs of recovery and China is picking up speed.

The significant headwinds that derailed the global economy during 2011 have partly faded and some could even become tailwinds driving growth in the year ahead.

Commenting on the latest report, Northern Bank Chief Economist Angela McGowan said:

"Although the global economy is far from being a bright place at the moment, current fears of a global recession are probably excessive.   There has been a continued economic rebound in the US and the conditions for emerging market growth have improved significantly. Without doubt the euro crisis is going to be with us for a long time and we will see bouts of financial turmoil.  However, our central forecast remains that the recession in Europe will be short-lived and that the euro currency will not collapse."

Euroland recession to be short-lived

The report says that European volatility will continue and could occasionally move to the edge of severe crisis. However, action from politicians and central banks will keep the global economy from falling into a similar predicament to that seen in 2008/09.

Europe entered a recession in Quarter 4 last year, but the downturn will be short-lived for a number of reasons.  Europe tends to follow the US economic cycle, although it generally lags by one or two quarters.  Emerging markets have become the most important export market for the euro area and the rising activity here is expected to support strong exports in Europe.  Furthermore, the European inventory cycle is currently being adjusted to be better aligned with overall demand conditions and finally, the fiscal tightening headwind, although significant, is starting to decline rather than intensify.

US and Asia on the right track

The Chinese engine is expected to start pulling again and join the United States in driving the global economy forward.  Although growth in western economies will remain subdued, emerging markets are expected to see solid growth as inflation falls back sharply and leaves room for lower interest rates.  Downside risks are still prevalent and principally stem from the euro debt crisis.

The report recognises that the Chinese property market is a threat but notes that the Chinese authorities have sufficient room to fight a collapse should that happen and along with the central bank, have already taken action to reduce both housing activity and house prices.  High income growth in China combined with low leverage in housing and continued urbanisation should all ensure that the housing market does not collapse. Also, as food represents 33 per cent of Chinese private consumption, falling inflation has a very strong impact on economic growth.  Northern Bank's latest report looks for growth in China to rise from 8 per cent in Quarter 1 this year to 10 per cent by Quarter 3.

The report explains how the US ended last year on a strong note and is so far the only region in the world to have recovered from the downturn earlier in 2011.  Growth in the US was 3 per cent in Quarter 4 last year and a combination of a recovery in private consumption and low inventories now point to positive growth of around 2.5 per cent in the year ahead. 

Ms McGowan explained:

"The world currently cannot risk 'another Lehman Brothers', as the room for maneuver in such a situation is much more limited this time due to very high budget deficits.  It is therefore expected that all efforts will be made in Europe to avoid such a situation."

"Despite the on-going risks that exist, our central forecast is for a small economic improvement at the global level in 2012.  While the euro crisis will continue to bring volatility, we expect the euro currency to muddle through with the US and China expected to pull global growth in the right direction."

Northern Bank's latest report forecasts that year on year global growth in 2012 will be 4 per cent,  an upward revision of 0.2 per cent from  Northern Bank's October 2011 report.  The US and Japan are expected to grow at 2.5 per cent this year and China is forecast to grow at 8.5 per cent.   Growth will be weakest in euroland where the recession in Quarter 1 and the ongoing debt problems will reduce annual growth to a mere 0.3 per cent.

ENDS 

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Global Scenarios report pdf