As challenges to the global economy intensify, regional growth is likely to diverge next year. During 2012, we expect stronger gross domestic product (GDP) growth in Japan and the US, while economic growth in many European countries is likely to decelerate sharply or even contract a bit.
Europe is the epicenter of global weakness. We now expect the European economy as a whole to contract modestly (by 0.1%) in 2012. This change in our view on Europe prompted us to reduce our estimates of global GDP growth to 2.8% for 2011 and 2.8% for 2012.
Uncertainty about the policy response to the sovereign-debt crisis in Europe has also created greater risk around forecasts for other countries, given the linkages between financial markets and global trade. For example, the recent collapse in commodity prices has raised questions about growth trends in many emerging markets, as well commodity-centric economies such as Australia. Recession in Europe would also spell trouble for countries with significant exports to Europe, such as the US and China.
As regional growth rates diverge, investors should be on the lookout for greater disparities in interest rates and currencies; we would expect the US dollar to strengthen a bit, especially relative to the euro.
We have shaved our 2012 forecast for Japan again, this time to 2.7%, because of the gloomy global outlook. Nonetheless, post-earthquake reconstruction spending should help underpin Japanese growth next year.
Elsewhere in Asia, it looks like there’s ample domestic demand and policy flexibility to sustain solid growth. We expect the region’s GDP growth to slow to 6.7% in 2012 from 7.4% this year, with growth in China and India moderating. The good news is that my colleagues in Asia do not think that China is in for a hard landing, although a slowdown to about 8% next year would represent a continued deceleration in GDP growth. Excluding China and India, growth in the more export-driven countries in the region is expected to decelerate to a relatively sluggish 3.7% next year.
As for the US, I’m relatively bullish because there are signs of improvement that should help support a modest recovery in domestic demand growth. The recent easing of commodity prices has helped subdue a substantial headwind that prevented a transition to a more norma lUS growth cycle and bolstered domestic spending.
The much improved financial positions of consumers, businesses and banks, along with the reduction in the housing overhang, has created conditions for a more normal economic cycle in the US than we have seen since the recovery started in mid-2009. Assuming that disaster is averted in Europe, we believe that the US is capable of surprising the markets with GDP growth of 3% in 2012.
The views expressed herein do not constitute research, investment advice or trade recommendations, and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Joseph G. Carson is US Economist and Director of Global Economic Research at AllianceBernstein.