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Global economic outlook – Summary

Key questions
• What are the prospects for the global economy in 4Q 2012 and 1Q 2013?
• What are the risks that the US economic recovery will falter in the near term?
• When is the European economy likely to emerge from contraction?
• What is the near-term outlook for the Chinese economy?

CIO View (Probability: 75%*)
Sluggish expansion
• Global economic activity has shown signs of improvement over the last month – albeit from a low base. Importantly, the JPM global composite PMI (a survey measuring economic activity) rose significantly to 52.5 in September from 50.9 in August. The increase was driven by improvements in both manufacturing and service sector activity. Thus, the global manufacturing PMI rose marginally to 48.9 from 48.1, while the services PMI jumped two index points to 54.
• Geographically, improvements were concentrated in the emerging markets and the US. Indeed, we think that downside risks in the US have diminished lately and we expect the moderate recovery to continue ahead. Chinese data are still mixed, but we think that an improvement in the economic momentum is in the cards in 4Q. In the EMU and UK, recent PMI surveys deteriorated but we still expect the EMU to improve gradually in coming quarters. Overall, we expect the moderate improvement in global economic activity to continue ahead. A key driver here is the latest wave of ultra-expansionary monetary policy. Downside risks have diminished somewhat in recent months. We expect Greece to stay in the euro this year and sign a new memorandum in November. In the US modest fiscal tightening is expected with the Fed mitigating downside growth risks. The risk of an idiosyncratic slowdown in Asia has declined as the latest Chinese data confirms that the economy has bottomed."
• Global consumer price inflation peaked in summer 2011 and has since fallen gradually. Base effects and rising commodity prices since June may push up the global headline rate of inflation in coming months.

Positive scenario (Probability: 10%*)
Return to long-term trend
• The Eurozone crisis abates. Financial market conditions recover, mitigating the drag from fiscal austerity.
• Growth in Western Europe turns decisively positive by early 2013 and the US economy grows above trend.

Negative scenario (Probability: 15%*)
Recession
• There are three key downside risks to the global economy: 1) a significant escalation of the Eurozone debt crisis; 2) a sharp fiscal contraction in the US, and 3) a sharp deceleration of the Chinese economy. Each of these risks could precipitate a significant downturn of the global economy.

Key dates
TBA Troika report on Greece
2 Nov Nonfarm payrolls and unemployment rate for October
6 Nov US presidential and congressional elections
8 Nov The 18th National Congress of the Communist Party of China
22–23 Nov European Council

Global growth expected to be around 3% in 2012 and 2013

[Table]
Real GDP growth in % | Inflation in %
2011 | 2012F | 2013F | 2011 | 2012F | 2013F
Americas US 1.8 2.1 2.3 | 3.1 2.1 1.7
Canada 2.4 2.0 2.3 | 2.9 2.0 2.3
Brazil 2.7 1.5 4.5 | 6.5 5.4 6.5
Asia/Pacific Japan -0.8 2.3 2.0 | -0.3 0.0 0.3
Australia 2.1 3.7 3.2 | 3.4 1.7 2.5
China 9.3 7.5 7.8 | 5.4 2.8 3.6
India 6.5 5.5 6.5 | 8.0 7.5 7.0
Europe Eurozone 1.5 -0.4 0.2 | 2.7 2.4 1.9
Germany 3.1 0.9 1.1 | 2.5 1.7 1.5
France 1.7 0.2 0.4 | 2.1 2.0 1.3
Italy 0.5 -2.4 -0.2 | 2.9 3.3 2.7
Spain 0.4 -1.6 -1.7 | 3.1 2.4 2.7
UK 0.9 -0.3 1.0 | 4.5 2.7 2.3
Switzerland 1.9 1.1 1.4 | 0.2 -0.5 1.2
Russia 4.3 3.8 3.7 | 8.5 5.1 6.8
World 3.2 2.7 3.1 | 3.9 2.9 3.0

Source: UBS CIO, as of 24 October 2012

In developing the CIO economic forecasts, CIO economists worked in collaboration with economists employed by UBS Investment Research. Forecasts and estimates are current only as of the date of this publication and may change without notice.

Services and manufacturing diverging
(Global PMIs, 3-month moving averages)
[Chart displaying trend lines for Manufacturing, Composite, Services, No-change line from 08 to 12]
Source: Bloomberg, UBS CIO, as of September 2012
Note: Past performance is not an indication of future returns.
*Scenario probabilities are based on qualitative assessment.

UBS
For further information please contact CIO economist Dirk Faltin, dirk.faltin@ubs.com and CIO economist Ricardo Garcia, ricardo-za.garcia@ubs.com
Please see important disclaimer and disclosures at the end of the document.
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