LONDON--(BUSINESS WIRE)--Citi’s economists are forecasting slower global growth, a recession in the Euro Area and further sovereign debt downgrades over the next two to three quarters.
In a seminal report released today – “Prospects for Economies and Financial Markets in 2012 and Beyond” – Citi’s economists also forecast a resurgence of global political risk and a lengthy period of ultra low nominal and negative real interest rates in major industrial economies.
They expect the euro to survive. “Our forecast is that the Euro crisis escalates and then is contained and mitigated somewhat by policy responses,” said Willem Buiter, Citi’s Chief economist. “However, that forecast is subject to considerable risks, most of them on the downside. On the upside, it is just about possible that the ECB and creditor nations may be willing to commit themselves publicly to provide extraordinarily large assistance early enough to prevent sovereign spreads widening further, although we regard this as rather unlikely.”
Citi still expects positive global growth, driven by emerging economies, but revised its forecast down again to a 2.5% advance in 2012 from a previous estimate of 3%.
Key highlights of Citi’s forecasts include:
- Fate of the euro: The Euro Area sovereign debt and banking crisis will intensify further in 2012, with wide sovereign yield spreads, continued bank funding stress and the Euro Area in recession. A break up is unlikely, though more ECB support will be needed to avoid disorderedly default of systematically significant Euro Area sovereigns such as Italy and Spain. The report addresses funding requirements and viable solutions in detail.
- Further sovereign debt downgrades: A series of further debt downgrades within the Euro Area over the next two to three quarters, including Austria, Belgium, France, Greece, Italy, Portugal and Spain. Outside of the Euro Area, sovereign debt downgrades are likely over the next two to three years for the US and Japan.
- Global Rates: ECB will cut rates to 0.5% in 2012, pushing overnight rates close to zero. The UK is likely to expand QE aggressively. Policy rates will stay at rock-bottom until 2014 in the US, 2015 in the UK and 2016 in the Euro Area. In China, monetary policy fine tuning, including an RRR cut, is likely before the Chinese New Year.
- Emerging Markets: Citi has developed an indicator to assess the impact of external events on emerging market economies. The indicator shows that pockets of EM – particularly in CEEMEA – remain vulnerable to declines in global risk appetite.
- Debt and Growth in Deleveraging: The hangover from the credit boom will continue with the ongoing bias to more private savings and private sector deleveraging capping growth in the US, UK and Euro Area. Citi compares previous major boom/bust credit cycles with recent trends.
- Political Will, or Political Won’t? 2011 was, from a political perspective, a “Year of Living Dangerously”, featuring a collision between sovereign debt dynamics and weak political leadership in the developed world, political change and conflict in MENA, and rising social unrest. 2012 will no doubt be a continuation of these themes plus two more: election fever and geopolitical risk.
To request a copy of the report, produced by Citi’s Investment Research and Analysis group, contact the Citi press office.
About Citi
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