While the Eurozone suffers and goes into recession in 2012 the rest of the world will grow with the USA managing 2% growth in the face of headwinds says the 2012 Global Economic Outlook from Nomura.
With the Eurozone at the centre of affairs and being held together by policymakers taking steps towards fiscal union, the global economy will still grow but at a reduced rate from 2011’s 3.8% at 3.2%.
The emerging markets will manage 5.6%growth in 2012 says Nomura’s report ‘Recovery Hits Euro Trap’, which is down from 2011’s 6.6% while the developed economies will see growth of 1.2% down from 1.5% this year. China and India will together account for 60% of global growth.
But although Nomura bases its report on the Eurozone staying together the report does say that ‘…there is a “fat tail risk” of a disorderly breakup’. If that happens it could hit Euro area GDP with a 6% drop, which could put the USA into recession and have ‘non linear’ effects on Asia.
"We expect the eurozone to enter recession and growth in the rest of the world to slow. A disorderly breakup of the euro represents a palpable risk to the global outlook: Europe’s leaders must act."
Although things look dire for the Eurozone and the UK in the immediate future Nomura expects this to precede a slowing of inflation in 2012 and a recovery in 2013, with the UK having benefitted from the 2012 Olympics.
More Quantitative Easing (QE) is also the order of the day for 2012. With the USA expected to ‘launch around $350bn of MBS-focused QE3 in Q1 2012’, the European Central Bank (ECB) to start QE early in 2012 and the UK to embark on a QE extension of Â£50 billion in February followed by another tranche of Â£25 billion in May.
Japan is expected to see growth mainly due to its programme of reconstruction after the recent catastrophes it has suffered.
But at the heart of it all is the Euro and its structure. Under the heading ‘It’s all about the euro’, the report says:
“We continue to take the view that the crisis in the eurozone is primarily a crisis associated with a flawed monetary architecture: too much monetary union (total in fact) relative to the amount of fiscal union (not much). Were the eurozone to be in fiscal as well as monetary union, a kind of “Unites States of the eurozone”, it is fair to say there would have been no sovereign debt crisis there: its overall fiscal deficit is much smaller than that of the US or the UK, its overall level of government debt is between those two, and, as a region as a whole it is making virtually no claim on the rest of the world’s savings. It is the architecture of the monetary union that this is generating and then amplifying fiscal and financial crisis impulses.”
It then goes on to say that ‘A breakup of the eurozone could trigger a global shock comparable in its impact to the 2008 financial crisis.’
But some might say that it could well be far worse than that.