Q3 outlook: More of the Same

Q2 was marked by dismal global economic growth driven by the world’s two largest economies, the US and China. This quarter the Bank forecasts only a minor improvement in world growth, but believes this leaves ample room for central banks and politicians to set the agenda.

Expectations are global economic growth this year of 2% will be more or less or a par with last year’s 2.1%. However, they have a more positive outlook for 2014 and predict growth will accelerate to 2.7%.

U.S

The strength of the US labour market in Q2, but says that this is not enough to completely overcome the effects of fiscal drag on the US economy. The Bank predicts that fiscal drag will remain sizeable in the second half of the year and that this will keep growth low. As a result, Saxo Bank has lowered its US GDP forecast for this year to 1.6%, slightly below the 1.8% consensus forecast and well below the 2.2% recorded in 2012.

Despite this reasonably gloomy outlook, the analysts predict that the US will return to stronger growth next year, when the fiscal drag will fade and the US deficit will narrow further. The housing recovery will continue to contribute directly to this recovery through residential investment and indirectly through higher home prices, which will lift people out of negative equity and increase purchasing power.

China

The Chinese economy has decelerated in 2013 as global trade growth lost momentum and the government was less forthcoming with stimulus packages than expected. Growth slowed to 1.7% in Q2, but it can be predicted that Q3 growth will be higher – not least if growth in the Euro area improves.

The analysts do not expect the new Chinese leadership to engage in any large-scale stimulus measures; however, they believe that smaller initiatives will be put in place. Consequently, they predict that growth will remain quite high in 2013 and 2014 at 7.3% and 7.8% respectively. Nevertheless, this is far below the levels seen in (late) 2009 to 2011.

Eurozone

The Eurozone has been in recession for the better part of two years, but there are tentative signs that the recession is coming to an end as the drag from austerity measures begins to fade and reduces the pressure on the purchasing power of households. The turnaround will be slow as unemployment remains high and wage growth remains low, which will restrict consumption growth. Forecast says that the Eurozone economy is on track to post even larger negative growth of 0.8% compared with the decline of 0.5% in 2012.

Mads Koefoed, Head of Macro Strategy at Saxo Bank, says:

“Net exports and investment have driven a large part of China’s growth in recent years, but global trade is currently muted. Given the weakness of European and US consumers – relatively speaking – not much bodes for a sharp pick up on foreign goods this side of New Year.

”The fate of the Eurozone is hanging on the German election later in the quarter. Europe’s undercapitalised banks are an issue that ultimately needs to be resolved before we will see credit flowing again in Europe.”