Macquarie :Global Economic Outlook -A more nuanced 2011

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Global Economic Outlook
A more nuanced 2011
Event
 We revise our outlook for the global economy.
Impact
 2010 was characterised by subdued growth in many developed economies,
contrasted against strong growth in emerging markets.  2011 however is set
to be much more nuanced, with growth in the US, for example, much
stronger.

Outlook
 We have upgraded our 2011 US GDP growth forecast to 3.5%, from 2.6%
previously.  In addition to the current spate of positive economic data pointing
to a recovery from the earlier mid-cycle pause, the recently announced new
tax deal is also expected to be voted through Congress in close to its current
form. This should add to both consumption and business investment growth
in 2011.

 In line with the stronger US growth and inflation outlook, we have increased
our long-term treasury yield forecasts. 10 year Treasury yields are now
expected to reach 3.75% by the end of 2011, compared to 3.00% previously.
We expect that sustained, above trend growth in 2011 would suggest a rise in
long-term yields, despite full execution of the Fed's QE2 bond buying scheme.
At the same time, ongoing uncertainty on European debt, particularly in 1H11,
could give Treasury prices support and cap yields into early 2011.

 We continue to expect that the Federal Reserve will implement the full
US$600b QE2 scheme, erring on the side of caution as inflation remains
subdued and unemployment stubbornly high. However, with the improving
economic outlook and rotation in membership of the FOMC, we expect that
the Federal Reserve will not undertake any further extraordinary easing
beyond QE2.

 The focus for Europe at present remains sovereign risk.  While the core
European economies are growing solidly (and German domestic demand is
set to accelerate further in 2011), European periphery debt concerns are
ongoing.  Indeed, over 1H11 we expect further escalation of sovereign
debt fears.  But with Spain considered 'too big to fail', as the risk of contagion
rises we see the distinct possibility of large pre-emptive action by European
policymakers.

 China is currently in a cautious period of transition on inflation, and
importantly, credit.  We expect further policy tightening in the short term on
credit, lending and rates. Asia ex Japan is a more slow-motion version of
China, with 2011 likely to be dominated by the timing of monetary policy
action in response to concerns of over-heating.  Structural rebalancing
towards greater domestic demand is also likely to remain a key theme.