Macquarie Research:: The developed/developing reversal

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Global Economic Outlook
The developed/developing reversal
Event
 We revise our outlook for the global economy.
Impact
 Following a year of outperformance in 2010 in many emerging markets, the
focus for 2011 is likely to swing to developed economies, where a strong
recovery is taking hold.

Outlook
 We have upgraded our 2011 US GDP growth forecast to 3.9%, from 3.5%
previously. The US is experiencing a strong tailwind into 2011, with 4Q10
growth surprising to the upside, leading indicators of the manufacturing and
services sector in strongly expansionary territory, and consumer retailing also
showing some strength. With recent fiscal changes and ongoing weakness in
the US dollar, we expect personal consumption, business investment and
exports to all support growth in 2011. We have also upgraded our 2012
outlook, to 3.3% growth, from 2.9% previously.
 We continue to expect that the Federal Reserve will implement the full
US$600bn QE2 scheme but that no further extraordinary easing will occur
beyond this. The Federal Reserve has consistently stated that it is looking for
strong ongoing job creation and a pick-up in core inflation as key indicators for
winding back monetary policy support, most likely in 2012.
 However, given the change in composition of the membership of the FOMC,
and the momentum that is currently building in the US economy, a key risk is
that the Federal Reserve may be particularly abrupt in changing its policy
stance.
 We have upgraded our 2011 EU GDP growth forecast to 1.8%, from 1.4%
previously. The core economies are expected to continue to strongly
outperform the periphery, with business investment the key driver of growth.
 As a result of the stronger growth outlook, and higher global commodity prices
pushing up headline inflation, we have upgraded our 2011 US, EU and
Japan CPI inflation forecasts, to 2.2%, 2.0% and -0.1% respectively, from
1.9%, 1.5% and -0.5% previously. We expect that central banks in most
developed economies will be largely tolerant towards higher levels of inflation.
 By contrast, emerging markets have passed their peak growth rates,
notwithstanding the recovery in the Asian trade cycle that is now coming
through. The combination of capacity constraints and inflation pressures,
stronger exchange rates and speculative capital flows are likely to force the
hand of policymakers in 2011, weighing on sentiment.
 In face of building inflation pressures, Chinese policymakers continue to try to
engineer a soft landing. We have upgraded our 2011 Chinese CPI inflation
forecasts, with year-on-year inflation expected to peak at 5.8% in 2Q10, up
from 4.0% previously.