Global Economic Heartbeat 2012

By M. Isi Eromosele

Economic indicators show that global growth remains sluggish in 2012, which has led to some volatility in financial markets. Between the seemingly never-ending European sovereign debt crisis, the slowdown in Chinese economic activity and some weaker-than-expected U.S. economic data, markets have been on edge recently. However, global economic activity continues to expand, albeit at much slower pace than expected. 

In the United States, real GDP growth downshifted from an annualized rate of 3.0 percent in the fourth quarter to 2.2 percent in the first three months of 2012. Recent indicators suggest that the expansion has continued in the second quarter as both the manufacturing and services PMI remained above the all-important 50 level in April.

The Chinese economy entered the year on a softer note as the 8.1 percent growth rate that was registered in the first quarter was the slowest year-over-year rate since the depths of the global recession in mid-2009. However, the rate of Chinese economic growth may be starting to stabilize.

Economic conditions in the rest of Asia have been mixed recently, although they are generally consistent with positive, albeit slow, economic growth. It appears that Japan registered a solid rate of real GDP growth on a sequential basis in the first quarter, although growth in other Asian economies that are tied more closely with China was lackluster. For example, the year-over-year growth  rate  in  Taiwan  was  only  0.4  percent in the first quarter, and real GDP in Singapore was up only 1.6 percent.

Economic conditions in the Eurozone have weakened even further. The manufacturing PMI declined from 47.7 in March to 45.9 in April, a three-year low, while the services PMI dropped from 47.9 in March to 46.9 in April. The Eurozone labor market also deteriorated further in March to  post  an  unemployment rate of 10.9 percent after a 10.8 percent reading in February, underscoring the still weakening labor environment in the region. The only bright spot in the Eurozone was a 0.3 percent print for retail sales in March. 

The Latin America region seems to be one of the least affected regions in the world by the recession in the Eurozone and the slowdown in the Chinese economy, at least so far. This does not mean that some of these economies have not suffered from the world economic environment; they have.

This has been especially the case for the Brazilian economy, with important ties to Europe on the manufacturing production side as well as with China on the commodity production side. The Brazilian manufacturing PMI dropped to contraction levels in April by printing 49.3 compared to a reading of 51.1 in the previous month. Industrial production for March was also weak, dropping by 0.5 percent on a seasonally adjusted basis and by 2.1 percent compared to the same month a year earlier. 

However, other Latin American countries have seen their economies improve during the first quarter of the year. Countries such as México, Chile, Perú and Colombia have seen improvements in growth during the first quarter of the year even though there are strong headwinds that could prevent this growth from continuing into the second quarter due to weak economic growth in other parts of the world.

It seems that once again this year, emerging market economies will outpace developed economies even though that growth may be lower than what these developing economies have been reporting during the past several years.

The World Economic Pulse

• The global economy, which has been in recovery for more than two years, entered 2012 on a soft note. Although the U.S. economy continued to expand in Q1, the United Kingdom slipped back into recession and the Eurozone probably entered a renewed slump as well. However, it appears that growth in many Asian economies, which slowed over the course of last year, may be stabilizing.

• The good news is that inflation appears to have crested, at least for now, in most countries. Therefore, Central Banks with policy flexibility have scope to ease monetary policy. For example, the Brazilian Central Bank has cut its main policy rate by 350 bps since August and loan growth in China appears to have stabilized after slowing throughout 2011. The bad news, however, is that many Central Banks, especially those in developed economies, have very little ability to ease policy further

• The global GDP growth will slow to about 3 percent in 2012, below the long-run average of 3.6 percent. Although global growth likely will be slow, we do not expect a renewed global recession

• Although our base-case scenario looks for continued global expansion, there are plenty of downside risks to keep in mind. A re-intensification of the European sovereign debt crisis could, in a worst case but plausible scenario, lead to a global credit crunch.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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