(Photo: REUTERS / Bobby Yip)
Nouriel Roubini, New York University Professor of Economics and co-founder and chairman of Roubini Global Economics, addresses a luncheon during the Asian Financial Forum in Hong Kong - file photo.
Roubini Global Economics (RGE) has predicted that global economy's growth next year will be marginally weaker than this year, with eurozone holding the biggest risk to global growth, and that the U.S. will not emerge any time soon from the worst unemployment crisis it has faced in decades.
RGE's global outlook for 2011 says a large part of the advanced world will continue to struggle with balance-sheet repair and debt crises, while plans to manage monetary exit strategies and fiscal sustainability remain uncertain at best. The report also says growth in the emerging world will also slip from the above-potential rates record this year and that tensions between the U.S and China will continue to be in focus.
Following are some details of RGE's 2011 outlook for individual economies:
Nouriel Roubini, who predicted the global financial meltdown of 2008, has revised down the outlook for the U.S. gross domestic product growth from a previously forecasted 2.8 percent this year to 2.7 percent, adding that the pace of growth will be insufficient to spur job growth.
"GDP growth in 2011 will most likely support a pace of job creation that will be barely capable of absorbing increases in the labor force and will fail to bring down the unemployment rate significantly." Roubini says unemployment will remain high at around 9.5 percent.
The report predicts the disturbing possibility that it will take at least a decade to bring down unemployment rate to five percent, even if the U.S. economy grows at a rate of 4 percent a year.
Also, inflation will remain below expectations, the report says. "Inflation will remain well below the implicit 2% Fed target for core PCE for quite some time. This implies no change in Fed policy; i.e., completion of the large-scale asset-purchase program and perhaps more quantitative easing."
However, the report predicts that the possibility of the country slipping back into recession is much lower now than before. "The tail risk of a double dip now is much lower than before: around 15-20%."
The report says economic growth in most of the major economies in the eurozone, including Germany, France and Italy, will slow down in 2011 and countries will have to follow stimulative fiscal policies.
"Next year will see major fiscal, structural and institutional adjustment in the eurozone (EZ) that could set the stage for future integration and cohesion if the political will can be mustered; or risk disorderly financial pressures in the EZ—and possibly a break-up—if these reforms are not implemented."
It also says growth divergence will continue in the eurozone. The eurozone periphery will continue to contract or grow only extremely weakly.
Roubini says Japanese economy is still in doldrums and is expected to weaken further, terming the situation as a "multidecade death spiral." "Japan is poised for another slowdown as consumer subsidies eat into future demand then expire at the end of 2010."
The report says the pace of Japanese exports and GDP growth will be largely determined by Asia’s underlying structural demand for raw materials and capital goods as inventory rebuilding has run its course and developed markets are undergoing balance sheet adjustments.
Also, budgetary stalemate will prevent discussion of regulatory reforms aimed at enhancing services-sector productivity, says the report.
The RGE report rules out the chances of China allowing a considerable devaluation of the yuan and says the tension with the U.S. over currency will remain in focus.
It says the hangover from the country's fiscal and monetary stimulus is beginning to set in, and that inflation will rise and growth slow.
"Fighting inflation will be the primary goal of monetary policy for at least the first half of 2011, though we do not expect an excessively restrictive lending quota for the banking sector."
Germany will remain a bright spot in an otherwise bleak European scenario with the country's export-led economic upswing predicted to be robust in 2011 due to strengthening support from domestic factors.
"The outlook for Germany’s traditionally weak private consumption is good in light of highly favorable labor market conditions, rising real wages, still-moderate inflationary pressures and buoyant consumer confidence."
However, the report also cautions that the economy has a substantial exposure to troubled eurozone economies and that banks should take advantage of the favorable economic situation and the positive earnings outlook by bolstering their capital cushions.
The UK economy will grow modestly in 2011, though fiscal austerity measures will affect the upward momentum, RGE says. "RGE expects modest growth for the UK in 2011. Headwinds include a weak outlook for consumer and capital spending.
"Fiscal austerity measures will affect growth, unemployment and inflation. The Bank of England (BoE) will keep the door open for further quantitative easing (QE) in 2011." There are also other risks like banking sector vulnerabilities, elevated headline inflation and falling home prices.
India faces upside risks to 2011 growth from the "virtuous cycle of strengthening consumption and rising domestic and foreign investment", according to the report.
"India’s domestic-demand-driven growth story remains intact thanks to favorable demographics and rising investment, but slow liberalization and implementation of structural and regulatory reforms could disappoint investors."
According to the repot the main risks for Brazil's economy will be a sharp global slowdown and a destabilizing spike in risk aversion.
"Tighter macroeconomic conditions and somewhat slower global growth should bring economic activity to more sustainable levels in 2011, though growth will stay above potential," the report says. It says the central bank will tighten monetary policy to contain inflation expectations.
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