U.S. OverviewEconomy—Early Post-Election, Q4 Still Subpar
Our outlook is for subpar 1.4 percent growth in the fourth quarter, and unless there is a sharp change in policy, we expect sub-2 percent growth in the first half of next year as well. Current strength in consumer spending is not sustainable, in our view, since real income growth remains weak due to modest job gains and weak wage increases, while some current spending has been financed by a decline in the saving rate. Going into 2013, there are a set of tax increases that may also hinder consumer and business spending. Meanwhile, core capital goods orders are down 23.2 percent on a 3-month average annualized rate in September; the bonus depreciation on capital equipment ends this year, and federal funding for extended unemployment benefits winds down. Residential investment will provide some offset to weaker business investment, but on net, we foresee growth remaining at 2 percent or less for 2013 given current trends.
Both headline and core CPI inflation are up 2 percent year over year. As we look to the fourth quarter and into 2013, we see a modest pickup in the pace of headline consumer inflation. However, given the soft demand outlook, combined with ample economic slack that restrains income growth and the pass-through of commodity prices, no acceleration of inflation is in tow. We expect the Fed to remain on autopilot with its open-ended MBS bond-buying program for the foreseeable future; the Fed is squarely intent on fostering a more receptive job-creating environment. As Operation Twist expires, we expect the Fed will step in and fill the $45 billion gap.
International OverviewWeak Global Growth but Risks Beginning to Fade
In the past several months, we have laid out our case for a global growth environment that is weaker than the long-run average for global GDP growth. Our forecast has also been consistently below the more optimistic forecast from the International Monetary Fund (IMF). We still expect weak global growth this year and next, before returning to a more “normal” growth rate in 2014. There are still a number of obvious challenges for global growth, but fiscal and monetary authorities around the world are taking appropriate measures to mitigate the downside risk.
We are not yet ready to signal the all clear. Europe is still in recession, growth in China will remain below trend for the next couple of years and the U.S. economy is still stuck in slowgrowth mode. That said, things seem to be on firmer footing than they were in the summer months when European sovereign bond yields were testing multi-year highs, China was feared to be headed for a more substantial slowdown and some forecasters thought the U.S. economy was poised to slip back into recession.
For the first time since the global economy emerged from the 2009 recession, the various risks seem to be abating rather than growing. Europe has a more robust framework for dealing with sovereign debt problems, China’s economy is stabilizing and, provided it can sidestep the fiscal cliff, the U.S. economy appears to be on firmer footing. The global outlook remains weak, but it is less risky, and it is on the mend.