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Forget Twin Shocks, Growth Will Rock: Buiter

The twin shocks of the earthquake and tsunami in Japan and the rise in oil prices following political unrest in the Middle-East and North Africa will not greatly alter growth prospects for 2011 and 2012, according to Willem Buiter, chief economist at Citigroup.

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“Our conclusion is that these shocks do not greatly alter global growth prospects for 2011 and 2012, and we continue to expect that global growth will remain strong in the year ahead,” Buiter said in a research report to clients.

Citi has upgraded more countries' growth forecasts than they have downgraded in recent months with Saudi Arabia, Russia, Venezuela and Switzerland seen by Citi as the big recent winners.

“High oil prices redistribute incomes from oil consumers to oil producers within countries and between countries. But the cross-country effects are likely to be more complex than a simple 'winners and losers' analysis based on oil consumption and production,” he said.

“Quite a few emerging market countries are likely to use fiscal policy to cushion the impact of high fuel prices on the economy, limiting the adverse effects on growth and real incomes at the expense of weaker fiscal balances,” he added.

Buiter expects those countries with big exports to oil producers to benefit from the surge in petrodollars and is confident about the prospects for Japan in the second half.

“In Japan the economy is likely to weaken in the second quarter, mainly reflecting damage and disruption to economic activity, with a rebound in the third quarter extending into the forth quarter because of reconstruction activity,” he wrote.

The Fed is likely to stay on hold for the rest of the year and will probably exit its unconventional measures in early 2012, according to Buiter.

Citi expects the US economy to grow by 3.25 percent in 2011 with the unemployment rate coming down to 8.25 percent.

“The outlook reflects competing influences of stronger initial conditions and potential new drags: the spillover from surging final demand late in 2010 to output and employment is colliding with uncertainties stemming from events in Japan and the Middle East, which have raised energy costs and unsettled risk appetites,” Buiter said.

Willem Buiter will appear on Worldwide Exchange at 09:30 GMT/04:30 ET