Global Economic Outlook --Europe woes, China grows ::Macquarie Research

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Global Economic Outlook
Europe woes, China grows
Event
 We revise our outlook for the global economy.
Impact
 The global macroeconomic environment continues to be difficult, with weak
economic indicators across multiple regions, ongoing risk aversion and
growing divergence in likely 2H11 growth trajectories between economies.
 Developed economies such as the US, Europe and the UK remained in a soft
patch over 2Q11, and recent economic indicators from the US in particular
reflect this tepid environment. While we expect that the slowdown in US
growth will prove transitory, with the economy reaccelerating in 2H11, the
same cannot be said for other developed markets. The European economy
should continue to lose momentum in 2H11 and the UK never really had
much momentum to begin with. Sovereign debt fears in Europe, meanwhile,
are likely to persist.
 Elsewhere, some emerging economies, especially India, are still grappling
with high levels of inflation. Hence markets will be faced with policy-driven
slowdowns as growth returns to a more sustainable pace. The exception to
this is China, where the economy and policymakers alike appear to have
reached an inflection point with a more balanced outlook between growth and
inflation, and without the hard landing that some commentators feared.
 Macquarie Economics' key macro calls are: that the slowdown in US growth
will prove transitory and will reaccelerate in 2H11, and that the Chinese
economy has reached an inflection point and the outlook for growth and
inflation are now evenly balanced. Moreover, we expect that sovereign debt
ructions will continue in Europe, with an organised default in Greece followed
by subsequent market concerns (and the need for a resolution) over Ireland
and Portugal. Hence the global economy will likely be dominated in coming
months by European woes, as China and the US grow.
Outlook
 We have downgraded our US 2011 GDP forecast, to 2.8%, from 3.1%, with
partial indicators for 2Q11 GDP suggesting that the June quarter was a much
bigger soft patch than previously expected. Nonetheless, with consensus
forecasts rapidly being revised down, we remain above consensus on our
expectations for US growth and our expectation for the growth trajectory in
2H11 remains largely unchanged. We continue to expect a bounce to growth
in 2H11, driven by a large bounce in auto production, net export growth and
stronger capital expenditure, with corporates focusing their spending
intentions on 3Q and 4Q this year given tax breaks and low interest rates. In
particular, while non-farm payrolls data have recently disappointed, we see
employment as a lagging indicator for the US, and hence weak data primarily
reflect activity in 2Q11 rather than activity going forward. Indeed, feedback
from personnel companies suggests hiring intentions and activity remains
solid.