MarketEye: Solid Economic Growth Through 2012

03.16.2010 // Posted by: Walt Custer // Posted in: Articles, Industry Conditions

Thanks to my colleague Ed Henderson here is the “economic section” of his March 2010 Henderson Electronic Market Forecast. See www.hendersonventures.com for more details on Ed’s monthly 20+ page newsletter.

Fourth-Quarter Statistics Confirm the Economic Rebound

Extremely loose monetary policies, along with huge dollops of deficit spending, have had the intended result. The global economy continued to accelerate during the fourth quarter when a strong 3.7 percent annualized quarter-to-quarter growth rate was posted. But the fourth-quarter statistics overstated the strength of the recovery because temporary factors, including inventory rebuilding, were responsible for sizeable contributions.

Moreover, the gains were quite uneven. The emerging economies boomed. China grew by 10.7 percent and India was ahead by 7.9 percent, both on a year-to-year basis. Inventory rebuilding helped to propel the US to a 5.9 percent annualized advance, while exports to China and other Asian emerging economies boosted Japanese GDP by 4.6 percent.

But West Europe saw its growth rate slow from 1.2 percent in the third quarter to 0.4 percent in the fourth quarter. The quarterly performance patterns key economies are illustrated in (Chart 1) & (Chart 2).

Guarding Against Inflation

Now that the global economy is out of the ditch, fiscal and monetary policy makers will have to implement their exit strategies. That is, if policies are not gradually tightened, inflation will surge. On the fiscal front, the public debt of rich nations has jumped from roughly 80 percent of GDP two years ago to a projected 100 percent level in 2010.

The problem is particularly crucial in Europe. The need to tamp down spending in Portugal, Italy, Ireland, Greece and Spain (the PIIGS) will weigh on GDP results during the near term. Consequently, West European economic growth will achieve only a 1.2 percent gain this year, after a huge 4.0 percent plunge in 2009. What’s more, growth rates will not exceed 2.0 percent during the next three years.

Now Comes the Hard Part

Implementation of the upcoming interest rate hikes by the major economic powers will be a very delicate task. They will follow increases already made by Norway, Israel and Australia. Meanwhile, “quantitative easing” policies are being phased out by the Federal Reserve Board (Fed), the European Central Bank (ECB), as well as by central banks in India and China. In the case of China, authorities have raised bank reserve requirements and implemented stricter loan standards in order to depressurize a rapidly-inflating asset bubble. But the tightening of the fiscal and monetary screws will not be sufficiently aggressive to keep the Chinese economy from accelerating from an 8.7 percent rate of growth in 2009 to 9.7 percent in 2010. But as pressure is ratcheted up further, GDP expansion rates will gradually slow. However, a robust 8.0 percent gain is still projected for 2012.

Japan Limited by Domestic Spending

Japan’s sizzling 4.6 percent economic surge during the fourth quarter was largely driven by exports, particularly to China. Outgoing trade will help to create positive economic growth during 2010. But only a 1.5 percent GDP gain is predicted for this year, after a 5.1 percent plunge in 2009. Meager increases for Japanese consumer spending, along with decelerating growth rates among its trading partners, will limit GDP gains during the next few years. Peak GDP growth will come in 2012, when a 2.0 percent advance is predicted.

Overall, the global economy is predicted to travel a smooth trajectory of accelerating growth that will reach 3.8 percent in 2012. Government spending retrenchments throughout much of the world will prevent the achievement of growth rates in excess of 4 percent anytime soon.

Global Forecasts

See (Chart 3) & (Chart 4) for Ed’s GDP and Electronic equipment growth forecasts by region through 2012.

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