Economists at HSBC Bank plc are upgrading their outlook for the global economy.

In a new report, HSBC says that the global economy “looks a whole lot happier than it did six months ago”, as fears of a double-dip have faded. For 2011, HSBC is raising its growth forecasts for the world as a whole to 3.3%, up from the 2.9% it previously foresaw.

HSBC expects the emerging world to drive the global economy, with growth of 6.4% next year, compared with just 2.3% for the developed world. However, within the developed world, HSBC has upgraded its numbers for the United States, thanks to the recently announced tax deal, which will support growth there for the next couple of years. HSBS is boosting its U.S. forecast for 2011 from 2.5% to 3.4%.

For Canada, HSBC is forecasting GDP growth of 3.0% this year, 2.6% in 2011 and 2.9% in 2012.

HSBC expects inflation to remain too low in the developed world, keeping interest rates low, too. “The Federal Reserve is likely to persist with its program of quantitative easing in 2011, desperate to prevent very low inflation from turning into deflation,” it says.

However, in the emerging world, the strength of economic activity has reignited inflation fears, HSBC says. It emerging economies pursuing various forms of ‘quantitative tightening’, in response.

Notwithstanding this brighter outlook, the report warns that “the structural position is a lot more disturbing.” HSBC says that, “Most Western economies are still a long way short of the paths they had been on before the crisis began so, although growth is picking up, the pace of recovery is still disappointingly weak: the high rate of U.S. unemployment simply emphasizes the point.”

The problem, HSBC notes, is deleveraging in the face of elevated debt levels. As the world economy tries to adjust, “there is a mounting risk of elevated financial uncertainty”, it says.

“The evidence from earlier episodes of financial excess is that economies never return to their earlier, credit-dependent, trend levels of economic activity. Instead, policymakers eventually have to accept the limitations of macroeconomic policy: failure to do so will, in our view, merely increase financial instability over the long term,” HSBC adds.

“The implications of our story for asset allocation are clear: we favour exposure in the emerging world over the developed world, a theme that can played in a myriad of different ways. We like gold, emerging currencies, equities with exposure to the emerging world and a variety of different commodities,” HSBC says. At the same time, it is cautious on cash, credit (relative to equities) and developed world currencies.

IE