Global economy to avoid recession, but will slow says Ignis’ Stuart Thomson

the global economy will avoid recession in 2012, but a slowdown will occur in the second half of the year, says Stuart Thomson, chief market economist at Ignis Asset Management.

The good news is that the global economy will avoid recession during 2012. It will avoid a double dip recession by a whisker, growing by just 2.25%, significantly below its productive potential of 3%, meaning that the world economy will experience a growth-recession. The major industrial economies have been experiencing a growth recession and history tells us that they can expect several years of volatile and sub-trend growth as they reduce their excessive consumer/corporate and financial sector leverage.

We believe that the major developing economies will experience contagion through trade and financial linkages from the major industrialised economies and will therefore experience their own growth-recessions. Growth-recessions for the developing economies will still produce considerably higher growth than their developed counterparts. Nevertheless, this is less than required to absorb their growing labour forces or satisfy consumer aspirations, thus increasing political risk.

This creates the first of three dilemmas for 2012. The developing economies have already begun to ease policy in response to slower economic growth, but they are playing a game of chicken with the major industrialised economies, afraid that if they ease aggressively and repeat the stimulus of 2008, it will lead to faster inflation.

The second dilemma will be in the US where the forthcoming Presidential election creates a problem between the Republicans and the Democrats/Obama over fiscal policy. Lack of agreement will produce a sub-optimal outcome for the economy, leading growth of 1-1.5% over the next few years and forcing the Federal Reserve to add further quantitative easing during this year.

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