Citi- ($MACRO) Global Economic Outlook and Strategy: August 2011

§ Global economic prospects continue to worsen markedly, especially for many advanced economies. This month, we are cutting our 2011-12 GDP growth forecasts for many countries, with sharp cuts for the US, Euro area and UK, but also modest forecast cuts for China and India. In all, we are cutting our 2011 global GDP growth forecast from 3.4% last month to 3.1%, and cutting our 2012 global growth forecast from 3.7% to 3.2%. This is the seventh biggest monthly cut in Citi’s global growth forecasts over the last 10 years (looking at forecasts for the current and following year). In general, we are cutting growth forecasts more sharply for advanced economies (AEs) than for emerging markets (EMs). Overall, we are cutting our AE growth forecast (for the current and next year) by 0.45% and cutting our EM growth forecast by 0.35%.

§ verall GDP growth in the major advanced economies already has been below-average for three quarters, and growth is likely to remain sluggish in coming quarters. Growth is capped by private sector balance sheet repair and fiscal drag (or fears of future fiscal drag) in many advanced economies. The downside is exacerbated by the abrupt tightening in financial conditions, and doubts over scope for monetary and fiscal stimulus to break the vicious circle between weakness in economies and markets. 

§ We now expect a long period of ultra-low and stable policy rates for the US, Euro Area, Japan and UK. In addition, the ECB’s liquidity assistance program will probably continue to keep overnight rates well below its policy rate, perhaps for the next 2-3 years. At present, we do not expect further QE by the Fed, but this could come into play if deflation risks re-emerge. Despite the UK’s above-target inflation rate, the BoE might well set a lower hurdle for QE, requiring just the expectation of sustained economic weakness and inflation undershoot rather than the re-emergence of worries of outright deflation. We expect broadly stable interest rates in EM over the next year, and we are not anticipating the widespread rate cuts that are currently priced into fixed income markets, thanks to inflation persistence and the scope for 'macroprudential' loosening.