economic forcasts revised up, up and up a little

economic forcasts revised up, up and up a little

June 9th, 2009

All those green shoots have moved one of the more bearish economic forecasters to upgrade economic forecasts for this year, next year and the year after. Capital Economics has uppedits estimates for Japan, and by rather a lot. The UK and the US are now expected to perform better than previously expected, while the Eurozone is likely to see only a modest gain. Projections for India and China have been upgraded too. It’s good to see. For the last couple of years, every time we have seen economic forecasters revise their projections they have been revised downwards, sometimes quite drastically. It makes a good change to see the movement on the upside, for once. What is interesting about the forecasts for the UK, is that the forecasts from Capital Economics for this year and next are now in line with the projections made by Alistair Darling in his recent budget. This year, the contraction is projected to be 3.5 per cent,with growth of 0.5 per cent next. When Mr Darling made his forecasts a couple of months ago, he was lambasted in the press for his optimism. In fairness to the critics, the Budget forecasts were hopelessly out of line with previous projections from the chancellor. For 2011, however, the view is quite different. Capital Economics reckons growth will come in at 1.5 per cent; in his Budget speech, Mr Darling forecast growth of 3.5 per cent. Capital Economics reckons two factors will hold the UK’s recovery back. Firstly, it argues house prices are still overvalued, and so more price falls will follow. Secondly, because of the size of government spending, the chancellor was only able to implement a limited fiscal stimulus. Capital Economics reckons that because the UK’s growth will be well below potential, inflation will remain modest. There is a potential risk, however, that was not pointed out. Surely the recent falls in sterling will be important for giving exporters a lift. The prospects in the Eurozone now seem to be so bad, there is a chance the pound may improve quite significantly against the euro. As for the US, Capital Economics is forecasting a 3 per cent contraction this year, 1 per cent growth next and 2 per cent the year after. During the build up to the economic crisis in late 2006 and 2007, Capital Economics was anarch bear on the US economy, and repeatedly said the prospects for the US were much worse than was generally realised. They were of course proven right, although they under estimated the extent to which troubles in the US would affect the rest of the world. Capital Economics reckons the big stimulus for the US economy will come from government spending. At the same time, it expects consumption to grow only modestly, and for the savings ratio to rocket. The star of the show is expected to be Japan. The extent of Japan’s slowdown has surprised almost everyone. Capital Economics reckons the economy of the Rising Sun will see growth contract by a terrible 6 per cent this year.For next year, it is predicting growth of 3 per cent, but says it could even be as high as 4 per cent. The consensus right now is for Japan to expand by 1 per cent next, but the latest data seems to suggest Japan is now on the road to recovery, and may already be out of recession. China is forecast to expand by 9 per cent both next year and the year after, and India by 7 then 7.5 per cent. The party pooper, however, is the Eurozone. The central bank in the region has proven to be reluctant to embrace the quantitative easing seen in the US and the UK, while interest rates remain higher in the region too. Perhaps more significantly, the region is still too reliant on exports from outside the area. Although two of its main customers, the US and the UK, are expected to begin their recovery soon, their consumption, which is the driver of the euro region’s exports, is expected to remain modest. As for the Eurozone’s other big customer, emerging Europe, well, forget it. Significantly, Capital Economics expects the yield on 10-year government bonds to fall. One of the big ironies of this crisis is that because times are tough, investors are rushing to safety, and for most that means government bonds. So while we keep reading about how in the US and the UK public debt is rising so high that credit rating may be downgraded, in reality, it seems sovereign debt will continue to be one of the safest of all asset classes and, therefore, yields will remain low. It also expects oil to fall back over the next couple of years and to be trading around $50 in 2011. It may be right, but then again, the recent rises in the price of oil are worrying. Capital Economics puts this down to speculation. After all, inventory levels of oil have been surging. Even so, the issue of peak oil has not gone away. The Chinese recovery is likely to be investment led, which in turn is likely to lead to rises in the price of oil. If Capital Economics’ forecasts for India and China are right, then it would be surprising if oil remain as low as it is predicting. It’s good to see forecasts lifted, for once. However, with the exception of Japan, India and China, the forecast growth for 2011 remains modest. The underlying problem is not going to disappear in a hurry. There is a need for savings rates in the UK and the US to rise, in order to fund the forthcoming retirement of baby boomers and repay debt.This in turn will mean less growth in consumption, and those economies that are reliant on exports will lose out. Somehow, we have to see an adjustment, with savings rates in the big deficit countries rising, and investment money flowing out, and savings in surplus countries falling, and investment money flowing in. Until that happens, growth will be anaemic. Article author: Michael Baxter from Defaqto,to see more articles by the author go to: For financial advice call Mark or Clare at GMP Independent Financial Advisers LLP on 0207 2886400    

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