Global economy watch - August 2012

At a glance

" is imperative to break the vicious circle between banks and sovereigns..." EU Summit Conclusions, June 2012

  • Global growth slows to3.1% in our main scenario for 2012, down from 3.6% in 2011, but could recover next year.
  • The Eurozone remains at the centre of this slowdown. Confidence across the bloc has dipped and financial market stress remains a key problem which is adversely impacting banking lending into the economy.
  • Our Focus: Credit in the Eurozone shows that Eurozone business lending has been significantly slower than in the US in the last year, and until the vicious circle between banks and sovereigns is broken the outlook for credit growth in the Eurozone will remain weak.
  • On the back of this stress, we expect Eurozone output to contract by 0.7% in 2012. Our main scenario for the UK is for output to be at a standstill in 2012 with risks weighted to the downside, but with prospects of a gradual recovery in 2013 as inflation falls.
  • Despite these problems in Europe, we expect that other key markets will continue to grow in 2012, albeit at modest rates compared with 2011. Expectations of above trend growth in US have been put on hold with mixed news coming from the housing market and manufacturing sector. Our main scenario projection is for the US economy to grow at a respectable 2.1% in 2012.
  • Both China’s and India’s economies are slowing, albeit from very high growth rates, and may be entering a new period of lower growth than we have come to expect. China’s leaders citied their strategy of economic transformation from exports to consumption-led growth when lowering their projection in 2012 to 7.5%, but in time this should spark a new area for business growth. India’s slowdown appears to have its roots in home-grown challenges.
  • Global events in the coming months will continue to be dominated by the Eurozone. Our timeline on the next page shows the key events businesses will need to navigate in the next couple of months.

Charts of the month

Figure 1 – Central banks in advanced economies have pumped unprecedented amounts of liquidity in to their economies...
Image in a modalSource: PwC analysis
Figure 2 – ...but GDP growth has not responded as hoped.
Image in a modalSource: World Bank