Projecting on Growth

• Though market volatility largely tied to European debt woes has been uncomfortable lately, fundamentals continue to be positive.
• A recent OECD report significantly raised global economic growth forecasts for 2010 and 2011—signaling its belief economic positives outweigh the negatives.
• And while some folks will continue to worry about possible ramifications of a weaker euro, a lower exchange rate can actually be a boon for European exports.
• In all, the OECD thinks the global economy is on solid recovery ground—and we agree.

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Despite heightened market volatility lately tied to European debt woes, economic fundamentals continue to be positive, underpinning the likelihood the global recovery is robust and sustainable. For example, the IMF recently revised its 2010 global economic forecasts higher. And on Wednesday, the OECD (Organisation for Economic Co-operation and Development)followed suit—significantly upping its aggregate member country growth projection for 2010 from 1.9% to 2.7%. Adding non-member Emerging Markets (EM), global growth is projected to hit 4.6% in 2010 and 4.5% in 2011—not bad compared to the average 3.7% from 2000-2006.

The OECD's upward revision is remarkable because it stands against a backdrop of fears (unfounded in the near term, in our view—Portugal's Wednesday debt auction was oversubscribed at unremarkable rates) of sovereign defaults. By raising its forecast, the OECD is expressing confidence that positive forces are more likely to outweigh negatives. We usually advise taking economic projections with several pinches of salt, and that hasn't changed—the OECD isn't infallible. Economic forecasts are constantly revised and have plenty of underlying assumptions that may or may not be appropriate. But it's not the exact numbers that matter, rather, the implied opinion: Euro problems aren't enough to stymie economic growth.

In fact, it doesn't seem the OECD thinks the sovereign debt crisis is even enough to stop eurozone growth. The organization raised this year's projected eurozone expansion from 0.9% to 1.2% and upped 2011's projection from 1.7% to 1.8%. So far, Greece is the only country projected to contract (-2.5%) in 2011, largely on austerity measures—no surprise there. Portugal and Spain are the next weakest, but both are expected to expand. Meanwhile, the biggest euro economies, France and Germany, are expected to grow 1.7% and 1.9% respectively in 2010, and 2.1% apiece in 2011.

Notably, German growth should "pick up strongly" on business investment and, importantly, trade. But where will all this trade come from and how? Emerging Markets and a weaker euro. A weaker currency can be for eurozone exports in the near term—especially to the strongest segment of the global economy, which is currently EMs. Cheaper European goods should be more attractive to the ever-broadening middle class in China and other developing countries and be further boosted by continued EM economic growth. China is expected to expand more than 11% this year, with Brazil and India growing 6.5% and 8.3%, respectively. Six EM countries—Mexico, China, Malaysia, Taiwan, Thailand, and South Africa—have reported better-than-expected Q1 GDP growth. As happened in Q4 2009, GDP is growing faster than expected overall in the developing world.

Rounding out the report, Japan got a big bump higher—from 1.8% to 3% in 2010. And only recently the center of the storm, the US is expected to continue clocking one of the quickest developed country recoveries. The OECD projects the US economy will expand 3.2% this year and next (up from the previous prediction of 2.5%).

In all, the OECD thinks current economic growth will be hard to reverse—and we agree.