Global Growth Should Slow To 4.0% In 2011-12 -State Street GA

Global growth is slowing this year and next, and the U.S. recovery is expanding at about one-third the pace seen in a normal recovery, according to forecasts from State Street Global Advisors.

"So far, the recovery has been a huge disappointment," said Christopher Probyn, State Street GA's chief economist at a luncheon in New York Wednesday. State Street Global Advisors handles the asset management business of State Street Corporation (STT).

In past business cycles, Probyn said, the strength of the recovery is related to the decline of gross domestic product during the recession. By that measure, real GDP should have grown at an annual rate of 7.5% in the first years of this upturn.

Instead growth is running about one-third of that, a large explanation why unemployment has not come down much since the recession ended in June 2009, says Probyn.

The reason for the subpar recovery is that the last recession triggered a severe loss of household wealth that prompted consumers to lift their saving rate rather than spend more. The shift has limited gains in consumer spending and weakened housing activity.

The U.S. will not see full employment return to 2015 or later, according to the State Street GA forecast.

The firm's global outlook calls for growth slowing from over 5.0% in 2010 to about 4.0% in 2011 and 2012. But the recovery will remain split.

Developing economies will see robust growth with inflationary pressures building. As a result, their economic policy will tighten.

The advanced economists will remain sluggish with stable inflation rates, leading to extremely accommodative policy.

Probyn expects the dollar to weaken on the currency markets, except against the euro.

He points to "soggy" U.S. economic fundamentals and an "extremely dovish" Federal Reserve that is trying to stimulate growth as reasons to expect the dollar to fall.

The exception, however, is the dollar's value versus the euro. State Street GA projects the euro zone's economy to grow 1.6% this year and only 1.1% in 2012. Given the expected growth slowdown, the European Central Bank is expected to stop tightening, even though zone inflation is above the ECB's target.

The euro zone will be hobbled by the festering debt crisis. The forecast says chances of a Greek default early in 2012 are rising and the eventual haircut on Greek debt will be between 60% and 80%.

Portugal will probably follow Greece into default but both nations will stay in the euro zone, says State Street GA.

-By Kathleen Madigan, Dow Jones Newswires; 212-416-2466; kathleen.madigan@dowjones.com

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