Global Economy Reviews

06.05.2015 15:17 World Economy Review - April 2015

Russia will see no economic growth in 2015-2016, according to a World Bank report published on the organization`s website. The bank attributes the recession in the Russian economy to a drop in private investment and projects a significant slump in GDP as a result.

According to the report, Russian GDP in 2015 may fall by 2.9 percent in an optimistic scenario and by 4.6 percent, in a pessimistic one. In 2016, the economy will grow by 0.1 percent in the best-case scenario, while negative circumstances could lead to a 1-percent fall in GDP.

One of the main factors that will determine which scenario will be realized is the oil price, warned the report`s principal author Birgit Hansl, World Bank Lead Economist for the Russian Federation.

“The impact of the main shock, the slump in oil prices, only began to affect the economy in the final quarter of last year, and the impact is likely to be more profound in 2015 and 2016,” said Hansl in the report.

For the positive scenario for 2016, oil prices should reach $68.7 per barrel; for the negative, $50. This forecast is significantly at odds with the figures released by the Russian Ministry of the Economy, which expects the country`s GDP to grow by 2.3 percent as early as in 2016.

Experts attribute the difference in the forecasts to excessive optimism on the part of the Russian authorities and a difference in approaches.

According to UFS IC chief analyst Alexei Kozlov, Russian officials` outlook is more positive than forecasts from international institutions, though overall their forecasts are broadly similar.

“Inflationary pressure and the rising cost of borrowing are having a negative effect on the country`s economy,” says Kozlov. In particular, the value of the ruble is largely driven by oil prices since the link between these two factors reflects Russian budget revenues.

“Economic growth forecasting is indeed made more difficult by the Russian economy`s strong dependence on changes in oil prices,” agrees Finam analyst Timur Nigmatullin.

Another reason for the discrepancy between forecasts lies in differing assessments of development in the key sectors of the Russian economy, explains an associate professor with the Finance and Banking Department at the Russian Presidential Academy of National Economy and Public Administration, Vasily Yakimkin.

According to Yakimkin, given the GDP drop of 2.1 percent in January 2015 and the 3.6-percent drop in February 2015, the Russian economy will shrink by 7 percent for 2015 as a whole.

“Capital flight will increase, the ruble will fall and there will be a local surge in inflation, which, taken together, will add up to a recession,” says Yakimkin. Therefore, he continues, there can be no talk of economic growth in Russia in 2016, if only on the basis of an analysis of global trends.

According to the World Bank, the problems in the Russian economy are of a structural nature. In particular, between the late 1990s and 2013, investment in Russia grew slower than in other world economies. As a result, the World Bank`s base scenario also envisages a rise in poverty levels from 10.8 percent in 2013 to 14 percent in 2015, and 14.1 percent in 2016.

At the same time, the World Bank has welcomed the Russian government`s decision to allow the ruble to depreciate in response to the burgeoning financial crisis of late 2014, with Birgit Hansl praising the country for being “able to respond swiftly with policy responses that successfully stabilized the economy.”

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04.04.2015 17:59 World Economy Review - March 2015

In the last several months, the dollar has strengthened tremendously against other currencies like the euro, the pound and the yen. This largely reflects the realization among investors that the American economy will do much better than other major economies in the coming months.

The dollar is now the strongest it has been against more than two dozen other currencies in more than 10 years, according to an index compiled by the Federal Reserve. One euro was trading at $1.09 on Friday, March 27th, down from $1.37 a year ago; many analysts predict that the two currencies could reach parity in the coming months for the first time since 2003. At the same time, the yen has fallen about 14 percent against the dollar.

Like any major move in the financial markets, the strengthening of the dollar has unnerved investors and policy makers. Some, like the governor of the Reserve Bank of India, Raghuram Rajan, have complained that we are in the “age of competitive devaluation and beggar-thy-neighbor policy.” He and officials in other countries, like South Korea, are worried that central banks have engineered the depreciation of currencies like the euro and the yen by printing money and aggressively buying bonds in a bald attempt to make their exports cheaper.

The European Central Bank and the Bank of Japan are buying lots of bonds to stimulate weak regional economies, but not necessarily to hurt other countries. If they are successful, it will ultimately benefit the entire global economy, including the United States, which is also hurt when the dollar appreciates because that makes American goods more expensive for buyers abroad.

The bigger question is whether monetary policy and a depreciating currency can make a significant difference. There is growing evidence that simply increasing the money supply may not be enough to revive weak economies, especially if demand in the rest of the world is not growing quickly enough. Countries cannot export their way to growth if other nations are not in a position to buy their goods and services.

That might help to explain why Japan`s economy is still struggling two years after its central bank began buying bonds in a big way, which has helped to send the yen tumbling against the dollar. A major part of the problem is that the government of Prime Minister Shinzo Abe has not done enough to reform the economy, for instance by getting businesses to invest more of their savings and increasing the employment of women.

There are some signs of a European revival, though not enough to celebrate a return to growth. Several countries, like Greece, Italy and France, are still shrinking, stagnant or barely growing. A weaker euro is good for all the countries that use it but will primarily benefit big exporting nations like Germany, which is already one of the strongest eurozone economies. Even if the euro reaches parity with the dollar, this might not significantly help weaker countries like Greece that are not big exporters or nations like Portugal that export mostly to other European countries. To help those nations, policy makers in the eurozone have to move away from mindless austerity and push through long-delayed reforms to encourage investment and job growth.

For the United States, a stronger dollar will serve to dampen growth, though by how much nobody can accurately predict because the relative values of currencies are hard to forecast. Some American manufacturers have said they are losing orders or seeing their profits decline as they are forced to cut prices to compete with the lower prices offered by European and Japanese businesses.

The appreciation of the dollar is a good reason for the Federal Reserve to hold off on raising interest rates this summer. But more than anything else, the stronger dollar serves as a reminder that the world is still far too reliant on the United States, which itself has not yet fully recovered from the financial crisis. That does not augur well for sustainable global growth.

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03.03.2015 14:17 World Economy Review - February 2015

Asia`s rise to global economic pre-eminence could see China and India leading the world by 2050, with Southeast Asia also making gains, according to PwC. However, Japan, South Korea and Australia are seen slipping down the world rankings without major reforms.

The projections came in the consultancy`s latest “World in 2050” report, which provides growth forecasts for 32 of the world`s largest economies, accounting for around 84 percent of global gross domestic product (GDP), based on purchasing power parity (PPP).

According to PwC, China is already the world`s biggest economy in PPP terms and will become the biggest at the more commonly accepted figures of market exchange rates by 2028, despite its projected reversion to the global growth average. China`s share of world GDP in PPP terms is forecast to increase from 16.5 percent in 2014 to a peak of around 20 percent in 2030, before easing slightly to 19.5 percent in 2050.

However, China`s growth rate is forecast to slow to just 3.4 percent annually during the period through to 2050, with its economy reaching $61 trillion in PPP terms.

India`s economy is forecast to expand by an average annual rate of 6.4 percent from 2014 to 2020, remaining faster than China after 2020 due to its “younger population and greater scope for catch-up growth.” However, the report said India`s envisaged golden destiny would require “sustained economic reforms and increased investment in infrastructure, institutions and mass education (notably for women in rural areas).”

Both the International Monetary Fund and the World Bank expect India to overtake China as the world`s fastest growing major economy in 2016. On Monday, India`s statistics ministry revised upwards its forecast for annual economic growth to 7.4 percent for the year to March, although it downplayed any rivalry with China. Neighboring Pakistan is also expected to advance, rising from 25th-largest in 2014 to 15th by 2050 with an estimated $4 trillion economy in PPP terms.

Southeast Asia is also set for further moves up the global economic ranks, led by Indonesia`s forecast rise from ninth in 2014 to fourth-largest by 2050 in PPP terms, at $12 trillion. The Philippines is seen surging from 28th place last year to 20th by 2050 at $3.5 trillion, narrowly ahead of Thailand which is seen holding its 21st ranking. Bangladesh is predicted to climb from 31st to 23rd, with Malaysia also rising from 27th to 24th over the same period. According to the report, Southeast Asia`s rise will be helped by a shift in overseas investment away from China due to its increasing labor costs.

Japan is predicted to slip from fourth-largest in 2014 in PPP terms to seventh by 2050, with South Korea dropping from 13th to 17th and Australia from 19th to 28th over the same period.

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06.02.2015 16:02 World Economy Review - January 2015

The World Bank lowered its global growth forecast for 2015 and next year due to disappointing economic prospects in the euro zone, Japan and some major emerging economies that offset the benefit of lower oil prices.

The global development lender predicted the global economy would grow 3 percent this year, below a forecast of 3.4 percent made in June, according to its twice-yearly Global Economic Prospects report. World GDP growth will reach 3.3 percent in 2016, as opposed to a June forecast of 3.5 percent, before dipping to 3.2 percent in 2017, it said.

"The global economy is at a disconcerting juncture," World Bank chief economist Kaushik Basu told reporters. "It is as challenging a moment as it gets for economic forecasting." The world economy has been more sluggish than expected since the 2007-2009 global financial crisis.

The World Bank said strong growth prospects in the United States and Britain separated them from other rich nations, including members of the euro zone and Japan, which continue to face anemic economies and deflation fears. "The global economy is running on a single engine, ... the American one," Basu said. "This does not make for a rosy outlook for the world."

Among emerging markets, Brazil and Russia in particular weighed on the bank`s global growth predictions, along with China, which is in a managed slowdown as it transitions away from an investment-led growth model. Basu said India`s economic growth should finally catch up to China`s next year and in 2017, at a clip of about 7 percent.

Like other forecasters, the World Bank predicted the roughly 60-percent drop in global oil prices since June of last year should be a net positive for the world economy, boosting oil-importing countries.

But while the World Bank expected oil prices to stay low this year, it said the positive price shock could take several years to feed into its growth outlook, while increasing short-term market volatility and reducing investments in unconventional oil such as shale and deep sea oil. The immediate impact of lower crude prices was limited to a 0.1 percentage point boost to the global outlook this year, the World Bank said.

Falling oil prices could also depress inflation around the world. Fears of deflation, along with overall gloomier global prospects and stagnant U.S. wages, could encourage the U.S. Federal Reserve to raise interest rates more slowly than anticipated, Basu said.

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08.01.2015 15:26 World Economy Review - December 2014

What prospect does the New Year hold for the world economy? The outlook that emerges from many forecasts is perhaps best described as "not bad", though inevitably there are risks, some of them quite substantial. The International Monetary Fund, for example, predicts global growth this year of 3.8% compared with 3.3% in 2014. That is not boom-time, though it would be the fastest growth since 2011.

There is often a "but" that comes with comes with an economic forecast, and this time there are quite a few. One of them is a development which might actually be a boost for most of the world. It`s the price of crude oil which has fallen by nearly half from the high it reached in June. For most countries it means consumers have more to spend on other things and it reduces business costs. Of course the price decline is bad news for oil exporters and it has already hit Russia hard.

The main source of strength expected by most forecasters is the US. The IMF reckons economic growth there is likely to be almost a full percentage point faster than 2013. It says a stronger housing market and business investment suggest the rebound is becoming more sustainable. That raises one of the big issues for the coming months.

The US economy has been growing faster than previously forecast. The continued recovery in the US means the country`s central bank, the Federal Reserve will probably raise its main interest rate, which has been close to zero for six years.

Stronger economic growth and increasing spending can lead to higher inflation, which can be contained by higher interest rates. A senior Fed official, Bill Dudley acknowledged that this change "will undoubtedly be accompanied by some degree of market turbulence".

Higher interest rates would make American markets more attractive to investors, so funds could be pulled out of other countries especially emerging markets. The danger is that it might happen in a disruptive way that leads to sharp currency declines, higher inflation and rising borrowing costs for governments and business in developing countries. Mr Dudley, however, said that many emerging economies appear better equipped to handle the Fed`s move than they were in past.

China is another important factor. The country`s economic slowdown is likely to continue: that is almost universally seen as inevitable sooner or later. China has been driven by investment and export performance that couldn`t last for ever.

The boom years have ended in China. All the same, adjusting to a slower growth rate will present challenges both for China itself and for countries that sell goods to Chinese industry - raw materials suppliers in Africa among them. Jan Hatzius, chief economist at the investment bank Goldman Sachs expects "several years of declining growth rates" for China.

And now there is new uncertainty about the eurozone as Greece prepares for an early election. Financial markets in other financially stressed eurozone countries, notably Italy and Spain, wobbled as political events in Greece unfolded. There is some risk that serious financial instability could spreading from Greece to other countries, but the dangers are seen as less severe than at the height of the eurozone crisis.

The political crisis in Ukraine could yet could yet do wider economic damage, and if the problems in the Middle East disrupt oil production they could send the price of the commodity back up.

here are certainly some rumbling sources of potential trouble and little prospect of really strong growth year, but there is a decent chance that 2015 will be another year of gradual post-crisis rehabilitation.

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