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The two-speed world economy

Standard Chartered's latest report outlines another year of a two speed world economy.

The aptly named report "Fragile West, Resilient East" by Standard Chartered outlines what everyone expects: recession in the West while emerging markets flourish.

According to the report, which provides a global overview, and investment implications for commodities, credit, equities, FX, rates and sovereign risk, as well as summarising the "key issues, risks, opportunities and likely outcomes in 2012 for 54 economies" (emphasis ours):

• We expect the world economy to slow further, particularly in early 2012. We expect 2.2% growth in 2012, after 3.0% in 2011 and 4.3% in 2010.
• 2012 will see a two-speed global economy: fragile West, resilient East. We forecast a recession in Europe (-1.5%), below-trend growth in the US (1.7%), and slower but still-robust growth in Asia (6.5%), Sub-Saharan Africa (5.3%) and the Gulf (3.2%).
• China is likely to slow significantly in early 2012 before a policy-induced rebound. We expect China’s economy to expand 8.1% in 2012, after 9.2% growth in 2011.
• The euro will continue to face significant problems. We expect the US dollar to strengthen in the near term on risk aversion, but to resume its downtrend as 2012 progresses. A multi-year shift into emerging-market currencies is expected to resume from Q2-2012.
• Our credit strategy team recommends focusing on quality and liquidity in Q1-2012, and raising allocation to beta in H2-2012.
• We see a firm floor for commodities, despite the global slowdown, due to tight supply.
• More rating downgrades are expected for European sovereigns; despite near-term worries, the long-term ratings of emerging markets should be supported by strong fundamentals.

Gerard Lyons, Chief Economist and Group Head of Global Research at Standard Chartered said:

“This points to the continuation of a two-speed world where a fragile West contrasts with a resilient East. It is a divided and disconnected world economy facing major policy dilemmas. Yet, no region is fully decoupled from events elsewhere. During the first half of 2012, problems in Europe and the West will weigh on global growth. By the second half, stronger growth across China and other emerging economies should pull up worldwide activity. It will be a recovery made in the East and felt in the West. If ever one needed to illustrate the shift in the balance of power, this is it.”

Interestingly, the US dollar is expected to perform well initially but the bank warn that over a longer term basis, there will be siginificant weakening:

For the foreign exchange markets, this points to a strengthening US dollar (USD) in the very near term as the US currency performs well in an environment of risk aversion.

But on a multi-year basis, this implies a weakening USD, reflecting the significant debt overhang for the US economy and continued, gradual diversification away from the USD by governments and other international investors. The euro is also expected to weaken sharply in the first quarter of 2012 and enter a longer-term downtrend as the euro-area authorities fail to deliver a co-ordinated and credible strategy to solve the region’s problems.

The weaker longer-term outlook for the world’s two largest reserve currencies signals the continuation of the multi-year shift into emerging-market economies and currencies, reflecting both their rising role in the global economy and their significant role in global trade. The broader trend of investing in liquid, investment-grade emerging-market currencies is expected to continue.

- Euromoney Skew Blog

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