The IMF recently revised up its global growth forecast (not for the first time) for this year and next and now expects the world economy to expand by 3.9% in 2010, followed by 4.3% in 2011. The projected expansion is heavily skewed towards the emerging economies, however, notably Asia, and within the advanced economies there is also a pronounced dichotomy, this time between the US and Europe, according to Bank of Ireland’s latest Bulletin which was published today, 4 March 2010.
Author of the Bulletin, Dr. Dan McLaughlin, Group Chief Economist, Bank of Ireland said: “The US economy picked up momentum in the latter part of 2009, growing by 1.4% in the final quarter, and the most recent data implies a strong start to 2010, with the result that the consensus GDP forecast for the year as a whole has moved higher and now stands at 3%. In contrast, the euro economy lost momentum in the final months of last year – Italy contracted and German growth was flat leaving GDP growth in the fourth quarter at just 0.1%. Moreover, the most recent data points to a weak first quarter exacerbated by adverse weather, and the consensus growth forecast for 2010, currently 1.2%, may well be revised down.
“The most recent data on the UK economy has also tended to surprise to the downside, although again the January figures were no doubt hit by the weather. The Bank of England has also become less optimistic on the UK growth outlook, and has revised down its growth projections for this year and next.
“These developments in the relative growth outlook have already influenced the FX markets, boosting the dollar, and interest rate expectations are also changing. Specifically, it now looks less likely that the ECB will raise rates this year, given the anaemic growth outlook for Europe and the implication that inflation will stay low, and we now expect the repo rate to stay at the current level until the first half of 2011. Nothing is certain, of course, but the ECB is likely to spend the rest of the year draining cash from the system in order to bring money market rates up to the repo level short term rates are currently well below the 1% repo rate, so any move in the latter would be ineffective anyway until the monetary overhang is addressed.
“The picture is less clear cut in the UK, as inflation is currently well above the 2% target and the unemployment rate appears to have stabilised, but the Bank of England feels that inflation will fall back and remain at low levels given the amount of spare capacity in the economy. Consequently, we now expect the first rate rise in the UK to emerge in the spring of 2011. For the US however, we still feel that rates will still start to rise this year, albeit in the autumn at the earliest”, concluded Dr. Dan McLaughlin.
4 March 2010
Dr. Dan McLaughlin
Group Chief Economist
Bank of Ireland Global Markets Tel: 01 609 3221
Media Relations Manager
Bank of Ireland
Tel: 01 604 3836
Download the March Bulletin (PDF, 131kb)