Central bankers began arriving for their annual policy symposium in Jackson Hole as economists from Citigroup Inc. to UBS AG cut forecasts for global growth and predicted interest rates will stay on hold until at least 2013.
Citigroup said the world economy will grow 3.8 percent this year and 4 percent in 2012 in purchasing power parity terms, down from 4.2 percent and 4.4 percent. UBS cut its estimate for expansion next year to 3.3 percent from 3.8 percent and Societe Generale SA pared its forecast to 3.9 percent from 4.6 percent.
The worsening economic outlook provides the context for three days of talks in the Wyoming resort featuring officials including Federal Reserve Chairman Ben S. Bernanke and European Central Bank President Jean-Claude Trichet. While global recession will be avoided, weak growth will force the Fed, ECB and Bank of Japan to leave borrowing costs unchanged through at least next year, Citigroup, Societe Generale and UBS said.
“A perfect storm hit this summer, driven by the turbulent winds of the euro debt crisis, U.S. debt ceiling, Tea Party, and concerns on the sustainability of the recovery,” Societe Generale economist Michala Marcussen said. “As financial market turmoil intensified, the storm clouds darkened further. Damage has already been done to the world economy, and the U.S. and Europe are now growing at close to stall-speed.”
Economic growth is deteriorating after the Standard & Poor’s 500 Index lost as much as $1 trillion since the U.S. was stripped of its AAA rating by S&P on Aug. 5. European officials are struggling to deal with a debt crisis which is nearing its third year and this month jolted France for the first time.
Deteriorating financial conditions, the inability of policy makers in the U.S. and Europe to deal with sovereign debt challenges, the likelihood of more restrictive fiscal policy and slower trade were behind UBS’s growth downgrade, economists led by Larry Hatheway said in a report to clients.
Equity analysts at Credit Suisse Group AG said in a separate report that their core scenario is for a “sub-par recovery” worldwide with only a 20 percent chance of the world falling back into recession. Emerging markets accounting for about half of global gross domestic product will help the world to avoid contracting, they said.
The outlook will likely force central banks to keep interest rates at or near record lows, the economists said. The Fed has already pledged to hold its benchmark rate near zero for another two years. The ECB has lifted its benchmark twice this year to 1.5 percent to fight inflation. The Bank of England’s key rate is at 0.5 percent and Japan’s is between zero and 0.1 percent.
“We expect a long period of low policy rates among major economies,” said Michael Saunders, an economist at Citigroup in London.
The policy makers and economists meeting in Jackson Hole will start their talks in the shadow of the Teton mountains with a dinner tonight before a breakfast speech tomorrow by Bernanke at which he may disappoint stock investors betting on a commitment to step up stimulus.
At a separate conference in the German town of Lindau, Nobel laureates split over whether Bernanke should pursue another round of quantitative easing after the two previous efforts did little to spur growth or hiring.
While Edmund Phelps of Columbia University told Bloomberg Television he doubted the “Fed can do anything to goose up growth,” the University of Chicago’s Roger Myerson said “a patriotic governor of the Federal Reserve system should serve the country by buying government bonds.”