The fourth quarter of 2011 could see lackluster global economic growth and risks of a possible worldwide recession if euro zone’s mammoth debt crisis drags on, according to Gain Capital’s Forex.com market outlook.
Forex.com’s report comes after the
International Monetary Fund (IMF) slashed its annual growth forecast for most advanced economies, spurring concerns that the slowdown could also stifle economic activities in emerging markets.
“The IMF now expects the major economies to grow around 1.6 per cent (down from [the June forecast of] 2.2 per cent) in 2011 and only 1.9 per cent (down from 2.6 per cent) in 2012. Significantly, the IMF 2012 outlook is based on [euro zone] leaders containing the debt crisis, the US finding a balance between stimulus and deficit reduction, and market volatility stabilising. Any or all of those conditions might fail, which is one reason we expect further risk aversion,” the report noted.
The global economy has faltered during most parts of 2011 with post-credit-crunch recovery still a far-fetched reality. Forex.com says the primary risk this year is that weak demand in major economies will lead to a more pronounced slowdown in emerging countries, “creating a negative feedback loop and potentially resulting in a much feared global recession.”
In its September outlook, the IMF also lowered its growth projections for emerging economies, but at a lesser rate. China and India are expected to expand by 9.5 per cent and 7.8 per cent in 2011, slowing down slightly by 0.1 per cent and 0.4 per cent, respectively, from the June forecast. By next year, the two major emerging economies are expected to grow around 9.0 per cent and 7.5 per cent, respectively.
The Middle East and North Africa (Mena), which had its share of woes this year following the
political unrest that brought some regional economies to a grinding halt, will likely grow 4.0 per cent in 2011 and 3.6 per cent in 2012, according to IMF estimates.
“In looking for bright spots on the economic front, our crystal ball is decidedly dim. Governments in most major economies continue to pursue austerity measures even as consumer sentiment gauges point to further retrenchment in private consumption,” Forex.com wrote in its report.
GCC not immune to euro crisis
Kathleen Brooks, Forex.com’s research director for the United Kingdom, Europe, Middle East and Africa, said fluctuations in fuel prices have massive repercussions for the Middle East, in particular the oil-exporting GCC nations.
“If Europe cannot solve the euro zone crisis in a sustainable way, then this would have enormous effects on global growth and the Middle East would not be immune,” she told Alrroya.com.
Brooks added that if bank stresses in Europe do not ease and belt-tightening measures are put in place, oil demand could be depressed, thus affecting the oil producers’ income.
“Added to that, the sovereign crisis also impacts the confidence levels of both business and household. It was a collapse in confidence this summer that caused the steep sell-off in risky assets over the last few months. If confidence continues to fall and businesses and households across the world stop spending then this could lead to a global recession and sell off in stock markets, which would not leave the Middle East unscathed,” she explained.
Forex.com, an affiliate of
Gain Capital Holdings, forecasts crude oil to head lower in the last quarter of 2011, due mainly to the slowdown in global economy, deteriorating oil demand and a stronger US dollar.
“Accordingly, we believe US Oil may trade within a $65-$90 [per barrel] range and UK Oil within an $85-$110 [per barrel] range in the coming quarter,” the study said.
Bailout talks lift short-term equity sentiments
Forex.com believes that market sentiment will “remain exceptionally fragile, with risk aversion playing a dominant role throughout the Q4”.
However, ongoing talks among the EU’s central bank governors regarding a reported €2-trillion (Dh10trn) rescue package has helped lift the global stock markets’ confidence in recent weeks.
Brooks said a resolution of the single currency area’s debt problems could stoke optimism and lead to a burst of risk appetite that may eventually result to market rally worldwide.
“There has been a change to the tone of the markets in the past couple of weeks and it seems like confidence is growing [amid hopes] that there may be a solution to the sovereign debt crisis. If there is one waiting in the wings, then risk appetite may well be sustained until the end of the year. It is starting to look as though the markets will not be phased by a Greek default, especially if it looks like it will be well managed,” she said.
The IMF and G20 nations have been
putting pressure on the euro zone to sort out their debt situation. Brooks said the immediate resolution of EU’s woes will benefit risk appetite and stock market confidence globally, including the Middle East.
She warned, however, that failure by the European leadership to deal with the debt situation could trigger a massive risk sell-off.
“So for the time being, watch what happens in Europe to determine the direction of stock markets,” Brooks said.
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