KUWAIT, Jan 3 (KUNA) — The National Bank of Kuwait released a report on Monday drawing a generally upbeat forecast picture of the world economy in the new year.
The report said, “Markets are entering 2011 with optimism at a notch higher for the world economy. This improved sentiment, built in 4Q10, is the result of more positive data from the major economies; a tax cut package and QE2 in the US, and the financial rescue of Ireland by the EU and the IMF. Certainly, earlier concerns of a double-dip recession were further alleviated by these developments. World economies and balance sheets recovered further in 2010 though are by no means totally healed. The market consensus view now is for emerging markets to outperform and grow near 6% while advanced economies grow 2%, for a global world growth of 4% (real GDP basis). Better than last year, and subject to perhaps moderate upward revisions, again in light of the positive developments above.
The stronger data reassures that current growth is sustainable. The recent Irish bailout reaffirms the EU’s commitment to save the euro and to avoid sovereign defaults (or restructuring, to use the more polite term). The extension of the Bush tax cuts in the wake of QE2 reaffirms the US authorities’ commitment to avoid, at all costs, a double-dip and/or deflation.
“The determination of governments in the major economies to act as they did is certainly a major “plus” for financial markets. There are significant caveats however.
The euro zone’s sovereign debt problems (Greece, Ireland, Portugal, etc.) are still with us and awaiting more permanent solutions.
The US tax deal extends lower tax rates for 2 years, reduces the payroll tax for salaried workers, and extends unemployment benefits. Thus, 2011 will see added fiscal stimulus (over USD 200 billion) instead of fiscal contraction. However, all that comes at a cost: even higher deficits and public debt ahead and no credible plan to reduce future deficits.
Moody’s recently said it may re-examine the rating of US debt in light of the new tax package.
In the US, retail sales, confidence, manufacturing, exports all posted encouraging numbers in 2H10, while housing and employment lagged behind. In November, the US economy added only 39K new jobs and unemployment rose to 9.
8%. Real GDP growth was revised to 2.6% in 3Q10 and appears headed for growth of over 3.0% in 4Q.
The market expectation should be near 3.0% for 2011 GDP growth with the new tax cut deal. However, the latter could push the 2011 fiscal deficit back up toward 10% of GDP. Inflation remains contained and the Fed should be satisfied that 10-year inflationary expectations are now at 2.3% up from 1.5% (and sinking) back in August. Falling inflation was the primary reason the Fed announced, and embarked on, QE2.
“QE2 entails buying USD 600 billion of additional Treasury debt into 2Q11 by the Fed, or an average of USD 75 billion per month. One purpose of QE2 was to keep long term rates low. Ironically the announcement briefly took the 10-year rates to new lows, near 2.3%, but 10-year interest rates have since jumped to 3.5% and higher on stronger data and forecasts, and on the credibility-busting tax deal.
In Europe, the core (France, Germany) continues to outperform the periphery, most of which is dogged by debt woes.
Recent fiscal austerity cuts Europe-wide are expected to slow down the region’s economy. Contagion fears remain for Portugal, and the much larger Spain and Italy, where spreads have come under pressure, the Ireland rescue plan notwithstanding.
“Observers seem to be positive on the world economy in 2011, with an eye on the risks above. The large emerging economies are growing but are expected to slow somewhat from their 2010 pace, in part because of tighter money linked to higher inflation (China, India).
The slowdown is however from high rates of GDP growth (over 9% in 2010 to around 8% in the cases of India and China).
“Oil and other commodities have been firm and have, among others, shored up the prospects for the GCC economies, where stock markets have outperformed in 2010. With the exception of Qatar, with double digit real GDP growth, the remaining GCC countries, including Kuwait, are expect to grow at 4-5% in 2011. Growth should be helped by the world recovery, but also by ambitious large government projects in most GCC countries.