Nouriel Roubini's Global EconoMonitor

RGE’s Wednesday Note – Reading the Tea Leaves for Q2 and Beyond

It’s that time again—every quarter RGE provides clients with macroeconomic outlooks for the countries we cover, along with updated country-by-country GDP and CPI forecasts. Our latest outlook, examining our projections for Q2 and beyond, is hot off the presses. It includes our analysis of the growth trajectories of over 70 countries or regions, summarized in our macro forecast table, and a special section on commodity prices. The following note is drawn from the introductory essay, in which Christian Menegatti, Rachel Ziemba and Nouriel Roubini discuss global growth trends. Clients can read the full essay, which includes our precise growth forecasts for the countries discussed below and an explanation of the assumptions underpinning our projections.

While the second half of 2009 brought signs of stabilization in growth rates and industrial production for many economies, and early 2010 has brought continuing strong global trade and improvement in output, the path to a self-sustaining recovery is not yet clearly shaped, at least in advanced economies. The recovery will be multi-speed. Most advanced economies, weighed down by debt, excess capacity and slack in labor markets will grow well below potential and in many cases, their potential output growth has fallen.

For 2010, the United States will lead growth along with some less-indebted, commodity-rich economies, but as fiscal stimulus and the boost from inventory restocking wears off, weakness in final demand will cause the pace of growth to slow. Growth in Japan will benefit from base effects and the effects of fiscal stimulus, domestic demand and Chinese demand. In contrast, the early onset of fiscal pullback in the eurozone means EZ growth will be reliant on external, not domestic demand. The UK and eurozone will both lag behind throughout 2010. The eurozone’s growth momentum stalled at the end of 2009, and continued negative growth in its periphery (the so-called PIIGS crisis) poses growth risks.

In contrast, emerging market (EM) economies in Asia and Latin America with strong balance sheets will outperform, growing at rates much closer to trend. Strong growth in China and India will lead Asia ex-Japan to robust numbers. Emerging Europe and the CIS will lag behind, however, as deleveraging continues.

RGE remains concerned that global growth will slow over the course of 2010. Inventory restocking and continued stimulus suggest many countries will report stronger growth in H1 2010, but as these factors wane and aggressive job growth fails to materialize, growth in many advanced economies—starting with the U.S.—is expected to decelerate in the second half of 2010. Private investment and consumption will struggle to post strong gains after the effects of stimulus policies start fading out. The end of destocking has propped up growth, particularly in Asia; but there are already signs that the growth momentum has slowed, particularly in Europe. The effect of inventory restocking may fade out by the middle to latter part of 2010.

RGE’s central scenario foresees the pace of the recovery remaining sluggish and anemic as consumers in the U.S. and other over-spending economies retrench and savings rates rise during a deleveraging process RGE envisions as a multiyear process. Labor and credit market conditions have improved, but RGE research suggests that consumers in surplus or over-saving countries lack the ability to pick up the slack from the U.S. consumer. The return to positive growth stems from the adoption of aggressive monetary and fiscal easing — as well as the backstopping and ring-fencing of the financial system in advanced economies and many EM countries. These measures kept the Great Recession from turning into a deeper recession or even a depression. Manufacturing indices, including the ISM in the United States and the Purchasing Managers Index (PMI) in other countries, have remained in expansion territory. However, private investment and consumption may be unable to fully make up for the lack of further government stimulus.

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