Goldman Cuts Global GDP Growth Estimate

Goldman Sachs Group Inc. cut its global growth forecast for this year and next, predicting recessions in Germany and France as the European economy stalls and the risk of a contraction in the U.S. grows.

The world economy will probably expand 3.8 percent this year and 3.5 percent in 2012, compared with earlier predictions of 3.9 percent for 2011 and 4.2 percent for next year, Goldman Sachs economists Jan Hatzius and Dominic Wilson wrote in an Oct. 3 report. The company lowered its forecast for earnings growth in Asia excluding Japan in a separate report today.

Europe’s worsening sovereign debt woes and the threat of a U.S. recession have roiled global stock markets, erasing about $13 trillion from equities since May. The debt crisis has infected the European banking system, making financial institutions wary of lending to each other and pushing overnight deposits with the European Central Bank last week to the highest in more than a year.

“The further deterioration in the economic and financial situation in the Euro area has led us to downgrade our global GDP forecast significantly,” the economists said. “Over the next few quarters, we now expect a mild recession in Germany and France, and a deeper downturn in the Euro periphery.”

Euro Region

Goldman Sachs predicts the Euro region will expand 0.1 percent in 2012, down from an earlier forecast of 1.3 percent. It expects growth of 1.6 percent for this year. Goldman also lowered its end-2011 forecast for the euro to $1.38 per dollar from an earlier projection for it to trade at $1.40.

The ECB has been forced to purchase sovereign bonds to prevent the crisis from spreading to larger euro nations, and is providing banks with unlimited liquidity for up to six months against eligible collateral as governments struggle to restore investor confidence in the 17-member region.

The Frankfurt-based central bank is likely to ease its liquidity policies further this month as a result of an increase in financial risk, Hatzius and Wilson said. The ECB will also probably cut its benchmark interest rate by 50 basis points to 1 percent by December, they said.

“The increase in spillovers from the Euro area, primarily via tighter financial conditions, is the primary reason why we have also downgraded our forecasts for the U.S. further,” the economists said. “We now see the risk of a renewed U.S. recession at around 40 percent.”

Flagging U.S.

The U.S. economy will expand 1.7 percent this year and 1.4 percent in 2012, Goldman Sachs predicts. It had earlier estimated a 2 percent growth rate for the world’s largest economy next year.

The Federal Reserve announced last month that it would replace $400 billion of short-term debt in its portfolio with longer-term Treasuries, a so-called Operation Twist, in an effort to further reduce borrowing costs and strengthen the flagging U.S. economy.

“We expect additional easing of monetary policy beyond the ‘Operation Twist’ announced recently, although this may not come until sometime in the first half of 2012,” Hatzius and Wilson said. “In addition, the market’s focus on changes in the Fed’s guidance on future policies -- including a greater emphasis on the employment part of the ‘dual mandate’ and/or a temporarily higher inflation target -- is likely to intensify.”

‘Downside Risk’

Asia excluding Japan stocks faces a “downside risk” of 10 percent to 15 percent, Goldman Sachs analysts led by Timothy Moe wrote in a report today.

Earnings per share may grow 10 percent this year and increase 7 percent next year, lower than an earlier prediction of 11 percent growth for both years, according to the analysts. They also cut their 12-month forecast for the MSCI Asia Pacific excluding Japan Index to 480 from 530.

Goldman Sachs analysts also lowered their forecasts for 2011 and 2012 oil prices. Crude prices will end this year at $112.50 a barrel, compared with a previous estimate of $119.50. It will be $122.50 a barrel at the end of 2012, compared with an earlier forecast of $138.50, according to the report.

“The oil market continues to destock as prices anticipate a potential crisis,” the economists said. “If the crisis does not occur, the oil market risks running into pressing supply constraints, requiring sharply higher prices than we currently forecast to force demand in line with supplies.”

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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Goldman Cuts GDP Estimates

Daniel Acker/Bloomberg

Goldman Sachs predicts the Euro region will expand 0.1 percent in 2012.

Goldman Sachs predicts the Euro region will expand 0.1 percent in 2012. Photographer: Daniel Acker/Bloomberg

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Goldman Cuts Global GDP Estimate

Scott Eells/Bloomberg

Pedestrians pass in front of 200 West Street, which houses the headquarters of Goldman Sachs Group Inc., in New York, U.S. Goldman Sachs predicts the Euro region will expand 0.1 percent in 2012, down from an earlier forecast of 1.3 percent.

Pedestrians pass in front of 200 West Street, which houses the headquarters of Goldman Sachs Group Inc., in New York, U.S. Goldman Sachs predicts the Euro region will expand 0.1 percent in 2012, down from an earlier forecast of 1.3 percent. Photographer: Scott Eells/Bloomberg