Tuesday, 16 October 2012

Mike Lenhoff: A medium term outlook with just a little less uncertainty

Image: © Ssolbergj
Medium term forecasts from Consensus Economics Inc show that over the next 5 years the US, the eurozone and China are expected to grow by an average annual rate of 2.7 percent, 1.2 percent and 7.6 percent respectively. As the National Institute used to say, a forecast, be it short-term or long-term, can convey a sense of precision that is not intended.

Taking the relative magnitudes then as the key feature, there is not much here to disagree with. If anything, the feature reflects what is widely understood about the broad economic backdrop. That is, due in large measure to Fed policy, the US economy is expected to grow at a pace not far short of its long term, post-war, growth rate of 3 percent, the eurozone is expected to grow modestly at best and China is expected to grow as the authorities intend, notably slower but more balanced.

So what is the message?

First, if China’s adjustment to a slower growth rate is running its course, the loss of global momentum that might be attributed to it is likely to be running its course too. GDP for the third quarter is due on Thursday and the consensus expects growth of 7.4 percent. The Organisation for Economic Cooperation and Development (OECD) composite leading indicator for China has been flat lining for the past three months after having fallen continuously for the preceding 18 months. Given the six-month lead time, this should be indicative of stability ahead for the economy.

However, China’s adjustment to slower more sustainable growth does mean it will be far less instrumental in supporting the global economy as it did in the period following the financial crisis. That much we know already.

Second, in contrast to China’s slower growth, the Bernanke-led Fed wants faster growth. Given that the high unemployment is viewed as mainly cyclical and not structural, faster growth is the answer to more job creation and a lower unemployment rate. So the Fed is going for it and the consensus forecast for the US is consistent with the commitment to supporting the economy. More >

Mike Lenhoff
Chief Strategist

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