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Emerging economies will continue to underpin global growth


- Growth in emerging economies remains strong, partly offsetting the slowdown in industrialized countries. Forecasts point to a soft landing in 2012

- Risks to global growth are strongly tilted to the downside, due to the European financial crisis

- Measures adopted in Europe to head off the financial and debt crisis are well aimed, but they must be implemented swiftly and correctly for financial tensions to return to normal and prevent growth from being undermined further

- Growth in the US rebounded in the third quarter, but the economy remains structurally weak, boding for a lengthy recovery

The global economy looks set to expand 3.9% in 2011 and 4.1% in 2012, with emerging economies contributing 75% to 80% of the growth. For the ‘Eagles’ we forecast growth of 6.7% and 6.5% in 2011 and 2012, respectively. Growth in the emerging countries should partly make up for the slowdown in the advanced economies, above all the US and Europe, where growth is forecast to be near 2% in 2011 and more moderate, especially in Europe, in 2012. Forecasts are strongly tilted to the downside due to uncertainties regarding the solution to the crisis in Europe.

Emerging economies are likely to continue underpinning global economic growth over the next two next years despite uncertainty, as the resilience of domestic demand should counterbalance the slight slowdown in exports.

GDP growth for the ’Eagles’ (Brazil, China, Egypt, India, Indonesia, Korea, Mexico, Russia, Taiwan and Turkey) is forecast at 6.7% for 2011 and 6.5% in 2012.

In Latin America and Asia, growth should remain robust, yet markets are starting to detect the impact on global risk aversion of how the crisis is unfolding in Europe.

Specifically, our forecasts for Latin America (Argentina, Brazil, Chile, Colombia, Peru and Venezuela) call for GDP growth of 4.5% in 2011 and 3.8% in 2012, and for Mexico of 3.8% and 3.3%, respectively. Broadly speaking, some of these countries have gone from being at risk of overheating to being vulnerable to a worsening of global economic conditions. In this respect, shoring up confidence is crucial for growth in this area.

Asia is on track to grow the fastest, with GDP growth forecast at 5.9% in 2011 and 6.4% in 2012, led by China (9.1% and 8.6% in 2011 and 2012, respectively).

BBVA Research believes the emerging economies are headed for a soft landing, with growth rates more in line with potential growth. To some extent, this would be good as it would reduce the risks of overheating considerably –if not completely- seen in several countries in Asia as recently as two months ago.

In short, the economic outlook for these countries is linked to that for developing countries and, more importantly, to the outcome of the European sovereign and financial crisis. How market confidence and tensions hold up will be key to the growth of emerging economies.

There are three clear risks to trends in these countries: 1) the possible increase in global risk aversion, which could imply an abrupt halt to capital flows to emerging economies; 2) a sharp decline in global activity, which could add downward pressure on commodity prices; and 3) weaker external demand and decreased finance of international trade, which could undermined exports and growth in these countries.

Right steps in Europe, but measures must be adopted swiftly and correctly

BBVA Research considers that the solutions proposed by the EU authorities “go in the right direction” to prevent the debt crisis from heightening and to face Greece’s insolvency, but that they do not provide a definitive solution to the crisis or achieve greater fiscal integration.

The crisis has shown that "a fiscal union needs to accompany the monetary union to make it credible in the long run,” so BBVA Research believes this must be addressed by the eurozone countries.

BBVA Research also believes the agreements undertaken leave certain elements unresolved, such as whether the European Financial Stability Fund (EFSF) will effectively reduce tensions in the sovereign debt market. It also highlights that the European bank recapitalization, which forces banks with systemic risk to raise their capital ratios, is being done inefficiently by not directly addressing cleaning up bank balance sheets and ignoring the idiosyncrasies of each country and each type of financial institution.

Sluggish growth in developed economies, with risks tilted to the downside

In this setting, growth in developed economies should remain moderate over the next two years.

In the eurozone, economic activity is clearly slowing, with financial tensions halting growth. GDP growth is likely to be much lower in 2012 than this year.

In the US, data for the third quarter show a certain upswing, easing fears that the economy would slip back into recession and pointing to GDP growth of 2.3% in 2012, up from the 1.6% forecast for 2011.

Even so, these rates are not nearly strong enough for the job market to recover, while risks surrounding household debt persist and the real estate market continues to flounder. What’s more, there are still doubts that political agreements can be reached over a suitable fiscal policy that supports the private sector in the short term and credible fiscal consolidation plans in the long run.

For BBVA Research, these forecasts, especially for Europe, depend heavily on a rapid and correct adoption of the measures approved at European summit in October. Otherwise, activity could deteriorate significantly next year because of the negative impact of financial tensions on household and business confidence, as well as on the cost of financing economic activity. This situation must be avoided because of the potential negative repercussions for Europe, let alone on a global scale.


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