ABJ - Aug 29 - A report from TD Economics indicates that the global economic outlook has deteriorated in recent months and the risks to the recovery have intensified.

Worsening U.S. and European growth prospects are the primary issue, not only because of their direct impact on global GDP, but also because of the implications for other advanced and emerging economies.

The global growth forecast has been revised down to 3.4 per cent for 2011 and 3.2 per cent for 2012 (compared to 3.6 per cent and 3.7 per cent, respectively, in June), but this assumes that fiscal progress is made in both Europe and the United States.

In the euro zone, preliminary estimates show real GDP stalled in the second quarter. During the second half of the year, economic conditions are expected to deteriorate further, as a number of headwinds exert greater resistance on growth. The recent escalation of the European sovereign debt crisis will likely curtail consumer and business confidence, with material repercussions for aggregate demand.

“In all, this means the euro zone is likely to experience a modest contraction on a quarterly basis during the third and fourth quarters—i.e., a technical recession—but still post growth of around 1.6 per cent year over year for 2011 as a whole,” indicates the report.

Furthermore, softer global demand for euro zone exports and fiscal tightening efforts will restrain the fragile euro area economy in the coming months. The negative forces will persist in 2012, leading to meager euro zone growth of 1.2 per cent next year.

In Japan, real GDP declined during the second quarter due to the natural disaster, but the overall economic contraction was smaller than first anticipated. Early reconstruction efforts helped to temper the decline.

“During the second half of this year, economic growth should turn positive, as continued strength in fixed investments will be joined by improvements in exports and private consumption,” the report states. “A risk for Japanese net-exports stems from the sustained strength of the Japanese yen. However, a stronger currency also reduces costs for the domestic economy through lower import prices, which provides some offset to the lost competitiveness on exports.”