Macro global economics q1 2012

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ECONOMICS

Macro Global Economics Q1 2012

When the wheels fall off
With the eurozone’s problems not yet over… …be prepared for major shocks to the consensus We highlight channels of infection and areas of immunity

By Stephen King, Karen Ward and Madhur Jha

Disclosures and Disclaimer This report must be read with the disclosures and analyst certifications in the Disclosureappendix, and with the Disclaimer, which forms part of it

Macro Global Economics Q1 2012

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Summary
Watch that consensus
Entering 2012, we are facing economic uncertainty on the grandest of scales. A year ago, policymakers and forecasters were cautiously optimistic that the worst was over. That view was clearly wrong. Even before the eurozone crisis came to the boil, the pace of globalgrowth was fading. Both the US and the UK had underperformed. Concerns over excessive emerging market inflation were replaced with worries about too little growth, particularly in China. The dominant issue, however, was – and still is – the eurozone. We argued in How to solve the euro’s problems (Stephen King and Janet Henry, 20 September 2011) that a break-up could trigger another greatdepression. There can be no doubt that policymakers now recognise this risk. That is good news. However, despite signs of greater urgency to deal with the problem, investors remain mostly unconvinced. This loss of faith is reminiscent of the collapse in confidence in 2008, when the wheels came off the global economy. Back then, forecasters completely failed to grasp the gravity of the situation. The samemay be true today. Our own forecasts have already come down a long way – we’re now projecting a fullHSBC growth and inflation forecasts GDP World Developed Emerging US UK Eurozone Japan Brazil Russia India** China Inflation World Developed Emerging US UK Eurozone Japan Brazil Russia India** China
Source: HSBC estimates *2013 forecasts were not available at this time, **Fiscal -year projections____________The Big Chill* ____________ 2012f 2.6 1.4 5.9 1.7 1.3 0.6 1.9 4.0 3.0 8.1 8.6 ____________The Big Chill* ____________ 2012f 2.7 1.7 5.8 2.1 2.4 1.8 -0.3 5.8 7.6 7.7 2.9

______________ Latest _______________ 2012f 2013f 1.9 0.6 5.3 1.5 0.3 -1.0 1.0 3.7 3.0 7.5 8.6 2.6 1.3 6.1 1.6 1.9 0.7 0.5 4.5 3.0 8.1 8.8

______________ Latest _______________ 2012f 2013f 2.6 1.7 5.6 1.9 2.3 2.0-0.4 5.6 7.0 8.1 2.9 2.4 1.5 5.3 1.7 2.1 1.5 -0.1 5.9 7.3 6.5 2.6

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Macro Global Economics Q1 2012

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blown recession for the eurozone and at least a technical recession for the UK, alongside an anaemic recovery for the US and a sluggish performance from many parts of the emerging world – yet there are still plenty of downside risks, even assuming the euro’s survival. Our initialprojections for 2013 offer a slightly less bleak message but the developed world, at least, continues to suffer from the economic permafrost we described in detail in The Big Chill (Global Economics, Fourth Quarter 2011) There are three main dangers: (i) problems hidden away in the financial system’s ‘black box’; (ii) worries about global contagion; and (iii) problems associated with policymakingimpotence.

The financial system’s ‘black box’
Black box problems resonate with the situation that unfolded in 2008. If the financial system as a whole is vulnerable, the relationship between interest rates, quantitative easing, fiscal policy and the economy more broadly begins to change in unpredictable and potentially damaging ways. With higher periphery bond yields, widening interbank and CDSspreads and downward pressure on bank share prices, all is not well in the eurozone financial system. If investors continue to hunt for safety, stuffing money under the proverbial mattress, a major credit crunch could result.

Global contagion
In a world of free-flowing cross-border capital flows, the risks of global contagion have increased. Our Asiabased economists have been quick to...
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