The global economy entered 2011 with considerable momentum. The leading emerging economies were expanding above their sustainable long-term growth rates, the U.S. economy was accelerating towards a healthy 3.5% or higher GDP growth, and the Euro Area was weathering better than expected its sovereign debt woes and austerity budget imperatives. In our view, it would take a severe jolt to reverse this momentum. On the other hand, the twin threats are real. Oil at $100/barrel is already elevating global inflation fears and could retard international and U.S. growth, and in the near term the Japanese economy may slip from our previous forecast of 1.3% growth in 2011 into a modest recession. Nevertheless, we continue to anticipate global growth this year in excess of 4%. Further, we expect reconstruction in Japan will provide a boost to global growth later this year and in 2012.
We expect markets to remain volatile in the immediate future, but at this stage we do not anticipate a significant and lasting decline. Predictions of what will happen next in the Mideast and Japan are difficult, and even more threatening storm clouds may materialize quickly. A further jump in oil and gasoline prices resulting from violent political confrontations in the Arab world will roil global financial markets. Additional setbacks in the earthquake, tsunami, and nuclear power catastrophe in the world’s third largest economy will add even more turbulence to already fragile markets. There is also the possibility of a new geopolitical calamity or natural disaster.
Consequently, our optimism is wrapped in caution. Clients should be concerned but not alarmed, remain vigilant and flexible, and maintain a longer-term perspective.