Growth Slowdown, But No Double Dip

- Global "We are downgrading growth forecasts for several key countries, notably the U.S., China and Japan. Nevertheless, we believe a double dip is unlikely — a long period of sluggish industrial country growth coupled with emerging market outperformance is more likely. The Fed, ECB, BoE, PBOC and BoJ are all likely to keep rates on hold to the end of this year, whereas previously we expected the PBOC to hike once in H2 this year."
- United States "Near-term growth estimates continue to edge lower on weaker financial conditions and new signs of a hesitant consumer. Federal Reserve officials remain relatively upbeat but have acknowledged the possible need to reenergise accommodation efforts if the labour market relapses or inflation forecasts slow in an environment of less supportive financial conditions. Barring an unlikely breach in confidence, a healthy business sector and stabilising credit conditions should support continued moderate recovery with low interest rates well into 2011."
- Euro Area "Available data signal a stronger-than-earlier expected increase in 2Q GDP. However, the 2Q reading is overstated by temporary factors and we expect a slowdown in growth in 2H. Broader-based fiscal tightening partly is responsible for the growth moderation. With the reduction of liquidity, the ECB has started the “normalisation” of monetary policy. While we do not expect an increase in the policy rate before mid 2011, money market rates have already started to go up."
- China "The economy began to show more signs of weakness at the end of the second quarter, with lower growth and less threatening inflation. Policy could turn to a more neutral stance, while outright easing may still need to wait for a deeper downturn to materialise. We revise down our growth and inflation forecasts on much weaker momentum, and no longer expect the PBOC to hike rates again in the rest of this year."
- Japan "Economic policies including concrete discussions about a consumption tax hike will likely stagnate with political decision-making expected to become dysfunctional in the wake of a setback for the ruling coalition in the Upper House elections in July. In this context, speculation has increased that more burdens to support the economy will be on the Bank of Japan."
- United Kingdom "Inflation is likely to remain sticky and above target for a while, reflecting the lagged effects of the weak pound and rising capacity use. The fiscal deficit has started to fall versus year-ago levels and is likely to fall much faster than the consensus expects."
- Canada "Robust domestic demand and rising inflation expectations warrant further modest policy tightening nearterm. However, increasing uncertainty about global prospects and intensifying downside risks from abroad obscure the outlook. We maintain our expectation of a gradual unwind of extreme accommodation, but now anticipate a policy rate of 2.50% in 2Q 2011 followed by a lengthy pause."
- Australia "The economy continues to perform robustly but, given global uncertainties, and with lending rates already back to average levels, we expect only one further rate rise before year end."
- Emerging Asia (ex China) "Economic momentum seems to be peaking, with exports and investment upturn to taper off on global uncertainties. Inflation has remained manageable for most, but Asian central banks still generally surprised with their earlier-than-expected policy normalisation — as is the case in Taiwan, Korea and Thailand — while India and Malaysia continued on their series of hikes. Robust long-term growth prospects remain intact. We still think Asia’s REER appreciation will persist in the longer term."
- Latin America "The peak of growth rates probably lies behind us, as we expect a deceleration of growth in 2H 2010 in most countries in the region. We have nevertheless not changed our policy rate forecasts, although risks lie on the side of smaller hikes in the case of Brazil for the September meeting."
- CEEMEA "The 2H slowdown that we have been expecting is here and we leave our main forecasts the same as last month's save for some 'housekeeping' updates. Fiscal consolidation plans remain a risk in some key countries — Hungary, Ukraine, Poland, for example. We haven't changed our policy rates outlook, but in general it seems that central banks are probably now more keen to stay accommodative for a longer period."
Citigroup Global Economic Outlook Strategy July2010

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