Global Economic Outlook - Beholden to Europe :Macquarie Research,

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Global Economic Outlook
Beholden to Europe
Event
 We revise our outlook for the global economy.
Impact
 Global financial markets and the real economy remain in difficult territory this
month, beholden to the ongoing sovereign debt crisis in Europe and the
slow and volatile progress made by European policymakers in sovereign debt
restructuring and providing finance mechanisms for bank recapitalisations.
 Although recent public statements indicate that European policymakers now
appreciate the gravity of the sovereign debt crisis, there is still a risk that
financial markets lose confidence in the pace of progress in resolving the
underlying issues. Nonetheless, the G20 meeting in early November now
appears to be a key date for these issues to be addressed.
Outlook
 After substantial revisions last month there are few changes to Macquarie
Economics' forecasts this month, although we note that the balance to
risks to our growth forecasts for Europe and China are both on the downside.
 For Europe, this is primarily a function of financial risks spilling over into the
real economy, with business sentiment and spending, household confidence
and consumption deteriorating.
 While for China, policy has tightened considerably over 2011 and the
combination of tight credit controls and exchange rate appreciation is
increasingly being felt in the real economy, presenting moderate downside
risks in the short to medium term. Nonetheless, our view remains that
Chinese policymakers will ultimately have a pro-growth bias and will act to
prevent a hard landing.
 In addition, fears that the US economy is falling off a cliff seem overblown,
with modest growth continuing in a number of key economic metrics.
 One revision that has occurred this month is bringing forward the timing of
interest rate cuts from the Reserve Bank of Australia to November 2011,
from February 2012 previously. The RBA has undertaken a significant shift in
policy rhetoric over the past month in light of deteriorating labour conditions,
weaker than previously estimated inflation data, and ongoing global turmoil.
 And the RBA is not the only one to shift to an easing bias. Global central
banks, most notably the Federal Reserve and Bank of England, and likely to
be joined by the European Central Bank, are increasingly easing policy and
once again expanding unconventional monetary policy in order to support
liquidity and growth.