World economic recovery suffers fresh setbacks, ICC/Ifo survey shows

Results of the ICC-Ifo World Economic Survey, released recently, reveal declining optimism over global economic recovery as fear continues to spread about the unsolved debt crisis in Europe.

The Survey, which received responses from 1,079 experts in 123 countries, showed that the world economic climate indicator fell to 85.1 in Q3 2012 after two successive increases. These results are significantly below the long-term average of 96.7 (1996-2011) for the Survey, conducted by the Munich-based Ifo Institute for Economic Research and the International Chamber of Commerce (ICC).

These findings imply a setback in the recovery of the world economy due to unfavourable assessments of the current economic climate and a less positive six-month outlook than in previous quarters, particularly in Europe.

The climate indicator for Europe sunk to 88.9 for the current quarter, down 20 points from its long-term average of 109.0.

“Political decisions are urgently needed in order to counter this widespread negative outlook and to boost investor confidence, starting with resolving the debt crisis in Europe,” said ICC Secretary General Jean-Guy Carrier.

While the experts downgraded their evaluation of the economic climate from previous quarters – standing at 82.4 and 95.0 in Q1 and Q2 of this year respectively – they implied that the global economy is still in recovery and has not fallen back into recession.

“What was surprising in this quarter is that the optimism that things will soon turn around has almost disappeared,” said Gernot Nerb, Ifo Director of Business Surveys. “This underscores that political actors like the European Central Bank should not wait much longer with actions to stabilize markets.”

Brighter days ahead for Asia

There is cause for some optimism, however, according to the Survey findings, which revealed that economic sentiment is improving in China, where experts anticipate further stimulus from the Chinese central bank and inflation seems to be under control.

In Western Europe and North America, the economic climate indicator fell compared to the second quarter, mainly due to far less positive expectations for the next six months. While in Asia, less favourable assessments of the current economic situation were primarily responsible for the indicator’s decline, after a strong upturn in the previous quarter.

Debt crisis takes a toll on Europe

The outlook among experts in Europe dampened, according to Survey results, because of the worsening debt crisis that has been hampering economic activity in the euro area.

In Greece, Italy, Portugal, Spain and Cyprus, assessments of the current economic situation remained at recession level. Assessments of the situation in Belgium, France, Ireland, The Netherlands and Slovenia were only slightly better. While in Germany, Estonia and Finland, the majority of participants continued to assess the current economic situation positively, although to a lesser extent than in the previous quarter.

Ireland and The Netherlands are the only countries where expectations have risen and are pointing to modest recovery in economic activity.

Inflation fears abate

World average inflation estimates for 2012 dropped to 3.4% in Q3, down from 3.6% in the previous quarter, according to the Survey. Weakening global demand has led to lower raw material prices and has been forcing companies worldwide to maintain stable selling prices or even to reduce them in order to be competitive. The experts polled on average expected short-term interest rates to fall over the next six months, but forecast that long-term interest rates would increase slightly.