By Kathleen Brooks, Research Director, Forex.com
Data has confirmed that the Eurozone fell back into recession, Japan has most likely entered a recession and the temporary factors that helped the UK to recently climb out of a recession may fade. On the other hand, the slowing growth in China is showing signs that it may have bottomed. We anticipate growth to refrain from slowing further in China and look for stabilization in the coming months as the country's new leadership settles in.
The Organization for Economic Co-operation and Development (OECD) released updated forecasts and sees total real GDP growth of its member countries at 1.5% in Q1. While this represents a slight improvement from current levels, it is far from robust. The IMF's latest World Economic Outlook (WEO) report forecasts world output to pick up in 2013 from 2012. However, the projections have been revised lower from the last update.
US manufacturing likely to remain soft
In the US, manufacturing activity is likely to remain soft as indicated by the lacklustre trend in regional Fed reports and the ISM manufacturing figures which are leading indicators. Consumption has been restrained as elevated uncertainties remain regarding fiscal policy. The fiscal cliff was a significant risk to growth in the US and the resolution may see a pickup in economic activity with the removal of key uncertainties.
This may result in increased consumer and business confidence which typically results in increased spending both from individuals as well as from the corporate side. Monetary policy is also doing its part to support growth as the Fed's program of mortgage-backed securities purchases (QE3) is seeing a pickup in housing market activity.
Eurozone to feel pinch of fiscal measures
The impact of fiscal tightening can be seen in Eurozone economies. Austerity measures across Europe have resulted in the region falling back into recession as the debt crisis continues. Europe's largest economy, Germany, has seen GDP growth slip over the past three quarters to a Q3 rate of 0.2% q/q. The ECB remains ready to initiate bond buys but it has reiterated that the ball is in the court of the governments to request aid. Additional action from the central bank to support the economy is not likely as it awaits action from member nations. As the region continues to deleverage, we expect growth to remain weak.
We also expect that global growth will continue to be uneven. Manufacturing PMI readings, which are leading indicators of economic activity, show the divergence with contractionary readings in European economies while China and the US show unimpressive expansionary prints. Overall, growth is anticipated to stabilize with fiscal tightening as the main impediment to increased economic activity. Currencies that are most sensitive to the global growth outlook are the commodity currencies (AUD, CAD, and NZD). Strictly from a growth perspective, we expect these currencies to remain subdued.