Modest world economic growth predicted for next year and 2012 by leading analysts

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Written by Ray Clancy

Thursday, 02 December 2010 10:28

The world economy will sustain modest growth through 2011 and 2012, thus avoiding a double dip, according to the latest economic strategy report from Schroders.

Despite the headwind from the ongoing problems in the eurozone Schroders analysts expect a further recovery in the US and predict that emerging markets will continue to perform strongly.

Meanwhile, inflation is expected to remain low in the US and eurozone as the recovery is not strong enough to put upward pressure on prices. While rate rises from the Federal Reserve and European Central Bank (ECB) is not expected until March 2012, some six months later than in a previous forecast.

‘We expect the Fed will stick to its schedule for completing $600 billion of quantitative easing (QE) by next June. Concerns about deflation are then likely to keep the US central bank on hold until they are confident of recovery in early 2012,’ the company says in a note from chief economist Keith Wade and European economist Azad Zangana.

The main driver of recovery in the US is expected to be the corporate sector with the upturn in profits feeding through into stronger payrolls and lower unemployment during 2011. ‘This should lift consumer incomes and spending, in effect sharing the gains of the recovery more evenly between firms and households,’ the note says.

‘The risks to our view are still skewed to the downside with the dangers of an escalation in the euro crisis and even the break up of the single currency, an outbreak of protectionism, or even a potential war in the Korean peninsula,’ it warns.

‘On the upside though there is the prospect of stronger growth as QE feeds through to liquidity in the emerging world and the chance that US households decide to save less and spend more,’ it adds.

The analysts expect Portugal to follow Greece and Ireland into debt crisis. ‘Germany has successfully persuaded the European Council to include some form of burden sharing in the design of the new bail out mechanism. The panic has pushed Ireland to follow Greece and seek help, and we expect Portugal to follow very soon,’ the note says.

Looking ahead, the analysts expect growth to moderate in 2011 as fiscal tightening begins in core Europe. ‘Our growth forecast for the region has not changed significantly, but our inflation forecast has been raised slightly, partly because we expect indirect taxes to be raised to help implement tough fiscal cuts. With the European sovereign debt crisis continuing to deepen, we expect central banks to keep interest rates on hold for longer,’ it concludes.