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After reaching a (nominal) record price early this month, gold is back in the news, with prices resuming their climb after a mid-month stumble. Risk aversion tied to renewed fears over the euro area is generally cited for the recent spurt.
Taking a longer view, the Economist Intelligence Unit believes that the gold price is now at or near its peak (details can be found at our Global Forecasting Service site: free registration required). The average price is expected to peak this quarter, with an 8% slide forecast for the second half of the year. Monetary tightening and a stronger dollar should push the gold price down further in 2012—in terms of the average annual price, we expect a decline of 12% next year.
The Economist Intelligence Unit’s latest world economic outlook (free registration required) is largely unchanged from last month, with global GDP growth (at PPP) forecast to reach 4.3% this year.
The biggest change to our forecast, unsurprisingly, is to the forecast for disaster-ravaged Japan. We now expect Japan to grow by 1% this year, down from 1.6% before the earthquake and tsunami that struck the country on March 11th. There will be a large contraction in the second quarter of this year, although growth will bounce back in subsequent quarters as rebuilding begins. In fact, we expect growth of 1.8% in 2012, up from an expectation of 1.4% before the disaster. This will do little, however, to boost Japan’s dire public finances, with the country’s budget deficit expected to reach 7.9% of GDP this year.
The perilous fiscal state of some euro area member states has been a long-running saga. It will continue to run, despite assurances from the currency union’s leaders—in reality, “something between a fudge and a failure”—following a high-profile summit last week.
To coincide with the summit, the EIU published a report on the euro area (free registration required), featuring a set of forecast scenarios and a custom-built “Debt Crisis Monitor”. The monitor measures the vulnerability of euro area countries to a debt restructuring, with a headline index comprised of three sub-indices for sovereign solvency, sovereign liquidity and the banking sector.
On the banks, Ireland unsurprisingly ranks top—by some distance—as far as riskiness is concerned. Some of the other results are more noteworthy: Cyprus has the second-riskiest banking sector in the euro area; lenders in the Netherlands are the least healthy in the “core” euro area; and banks in Germany and Italy are seen as equally risky despite the countries’ diverging fiscal fortunes.
Our latest global forecast, published today (free registration required), sees global growth expectations little changed from last month. However, rising inflationary pressures—fuelled by soaring commodity prices—will bring about interest rate hikes sooner than we previously expected.
Namely, the Bank of England is now expected to raise its policy rate in the second quarter of this year. Inflation in the UK has run above the central bank’s 2% target for 14 consecutive months, and we expect it to approach 5% in the next few months. The European Central Bank is now forecast to raise its benchmark rate in the first quarter of 2012, instead of later in the year, for similar reasons.
The US Federal Reserve, by contrast, will keep rates at rock-bottom levels until the second half of 2012.
Our latest global forecast, published today (free registration required), features an upward revision. We now expect global GDP growth to reach 4% this year (at purchasing-power parity), up from 3.8% a month ago.
The forecast for US GDP growth in 2011 is now 2.7%, up from 2.2% last month. A second round of fiscal stimulus, rising retail sales and improving industrial production underlie the upgrade. The other major factor driving the global revision is more robust growth in the euro area, where we expect expansion of 1.5% this year, up from 0.9% last month. This is thanks largely to Germany, as its export-led recovery appears to be broadening out, with domestic demand playing a larger role.
China is expected to grow by 8.8% this year, a benign slowdown from an estimated 10.2% in 2010. This will feed through to growth of only 1.3% in Japan in 2011, down from an export-driven jump of 4.3% last year.
Despite the sunnier forecast, daunting risks remain. The fiscal outlook in America is dire and the stability of the euro area is as tenuous as ever. Meanwhile, rapid growth in emerging markets has given rise to fears of overheating, particularly in China and Brazil, with stubbornly high inflation threatening to trigger an abrupt tightening of policies.
Our latest monthly forecast is published today (free registration required). The most noteworthy change is a significant upgrade to US GDP growth in 2011, from 1.5% to 2.2%. This pushes our outlook for world growth next year up slightly, from 3.7% to 3.8%.
The extension of the Bush-era tax cuts and unemployment benefits will boost demand in the US by half a percentage point in 2011. However, growth will remain subdued compared with what is normal for this stage of a recovery, and short of the pace needed to reduce the stubbornly high unemployment rate.
Although the new stimulus is the result of a welcome outbreak of bipartisanship, it is only a bipartisan agreement on how to spend borrowed money. With a fiscal deficit estimated at 8.9% this year, the continued lack of clarity on bringing government finances back onto a sustainable path could, eventually, lead to global financial markets questioning the security of US Treasury bonds.
The latest survey of financial industry executives by PricewaterhouseCoopers and the Confederation of British Industry is encouraging, with reported business volumes up for the fifth consecutive quarter. But the results are also tinged with disappointment, as survey respondents’ forward-looking expectations have been far too optimistic in recent months.
Last quarter, a balance of 63% of respondents expected volumes to improve over the next three months; in the end, “only” 28% actually reported higher volumes for the quarter. In the latest survey, which closed on September 1st, a net 24% of respondents expect higher business volumes over the next three months. This can either be seen as a warranted moderation in forecast volumes or, given financiers’ recent tendency to overshoot, sign of a significant slowdown ahead.
China’s key policy challenge this year and next will be to manage a deceleration in credit growth following the boom in bank lending last year. The rapid expansion in credit fuelled a steep rise in property prices; officials must now carefully deflate this developing bubble. Monetary policy is expected to remain relatively loose, so bank lending will instead be crimped by higher reserve requirements and stricter credit quotas. Still, loan growth is expected to be buoyant this year, with the full-year total approaching US$1trn.
The bad news in Greece keeps coming, with a fresh wave of downgrades hitting the country’s sovereign credit rating as well as those of its largest banks. Little solace can be found in the EIU’s latest financial services report for Greece (link for subscribers; link to online store for non-subscribers).
Our latest forecasts for the Greek financial sector feature both a contraction in credit and a flight of deposits in the coming years. Banks’ significant holdings of government debt also risk significant write-downs when, as the EIU expects, Greece will need to restructure its debt in 2012, before it returns to the markets to refinance its formidable borrowing requirements in 2013.
The new, independent Office for Budget Responsibility (OBR), created by Britain’s recently installed coalition government, published its first forecasts on Monday. The group’s GDP forecasts were less optimistic than the ones published in March by the treasury under the previous government. The OBR expects the UK to grow by 1.3% this year and between 2.6% and 2.8% in 2011-14. (The EIU expects significantly slower growth, with a rise of 0.8% this year and between 1.1% and 1.6% over the following four years.)
Despite these more downbeat economic expectations, sterling rallied in response to another aspect of the OBR’s report; a lower-than-expected deficit. Thanks to higher-than-expected tax receipts, the UK’s deficit is forecast to reach 10.5% of GDP this year, down from a previous forecast for 11.1%. Although more manageable, this remains a daunting figure. The measures taken to address it, to be announced in an emergency budget on June 22nd, will be closely scrutinised.