Global Economy Reviews

06.07.2015 14:39 World Economy Review - June 2015

The World Bank downgraded its outlook for global economic growth this year amid a broad-based slowdown in emerging markets and softer output in the U.S.

The development institution said that it now expects the world economy to grow by 2.8%, 0.2 percentage point slower than it estimated in January. “Global growth has yet again disappointed,” said World Bank Chief Economist Kaushik Basu.

Sharp contractions in Brazil and Russia, alongside weaker growth in Turkey, Indonesia and scores of other developing economies are offsetting healthier growth in Europe and Japan, the bank said in its Global Economic Prospects report.

The bank expects global economic growth in 2016 to accelerate to 3.3%, barring trouble in emerging markets as the U.S. Federal Reserve moves toward raising rates. The forecast also assumes recoveries in the eurozone and Japan take hold.

Although the U.S. economy is gathering steam, a brutal winter sapped output in the first quarter and prompted the bank to downgrade prospects for this year by 0.5 percentage point to 2.7%.

A host of challenges are weighing on growth in many of the world`s largest emerging-market economies, countries that helped drive the global recovery in the wake of the financial crisis.

“There is a structural slowdown under way,” said Ayhan Kose, the lead author of the report. “Increasingly, they have difficult growth prospects going forward.”

Many of those economies are reaching the limits of their capacity to grow without major policy overhauls that would open up markets, improve the business environment and increase productivity. Trillions of dollars are needed to expand the arteries of economic growth: roads, railways, ports and other infrastructure.

These emerging-market economies also relied on international sales to power growth over the past decade. But now those export-reliant developing countries are struggling to cope with weak demand across the globe as rich nations continue to struggle to recover from the ravages of the financial crisis.

China, the world`s No. 2 economy and a primary export market for much of the world, is slowing after two decades of breakneck growth as a faster clip than expected. Commodity prices have plunged in the past year amid anemic consumption and resource oversupply.

Adding to their economic headaches, emerging markets are facing dangerous mix of headwinds, having borrowed heavily to finance their decadelong expansions.

Borrowing costs are expected to rise as the Fed prepares to raise interest rates for the first time in nearly a decade. That prospect has also sparked a strong dollar rally, tightening the squeeze on developing-country governments and corporations that borrowed dollars but whose income is denominated in local currency. Investors are increasingly questioning their ability to pay for ballooning obligations amid slowing growth.

The bank`s forecast for a pickup in global growth to 3.3% next year assumes that there is no repeat of the type of volatility that struck emerging markets in mid-2013. Then, former Fed chief Ben Bernanke set off the so-called taper tantrum that triggered emerging-market bond, equity and currency selloffs when he signaled a pullback in the central bank`s stimulus.

But the World Bank said the Fed`s liftoff and long-term tightening cycle combined with domestic uncertainties could fuel major swings in financial markets, capital outflows and contagion throughout emerging economies.

“Our baseline is that it`s going to be smooth sailing,” said Mr. Kose in an interview. “But it still is a realistic concern and with all of these combined, the question is: `Is there a perfect storm outcome?` ”

A pickup in growth next year also assumes that recoveries in Europe and Japan prove durable, a prospect that is still questionable, he said.

Those risks are why governments across the globe are the reason World Bank economists are redoubling their calls for economic overhauls.

“We often repeat that countries must complete `structural reforms` again and again,” Mr. Kose said. “But in the context of Fed tightening, these reforms are critical.”

Investors are growing increasingly wary. The Institute of International Finance—an industry group representing around 500 of the world`s largest banks, insurance firms, hedge funds and other financial institutions—forecasts capital flows into emerging markets will fall to their lowest level this year since the financial crisis.

Falling oil prices and sanctions against Russia for its Ukraine interventions have forced the country into a deep recession. Brazil, where a corruption scandal is reaching the highest levels of the government, is contracting as commodity prices fall and the country struggles rekindle growth prospects. Turkey`s recent elections, instead of cementing the ruling party`s power, has cast a cloud over the country`s political fate and is fueling investor worries that the government won`t enact much-needed economic overhauls.

Such structural reforms - such as opening up long-closed sectors, overhauling outdated or overly burdensome regulations and other policies that help markets work more efficiently - are often painful and politically controversial in the short term. The outcomes often don`t bear fruit for years.

But in the context of all the challenges facing those economies and their need for investment, “there is a very valuable signaling effect associated with those reforms during this transition period of lower commodity prices and higher interest rates,” Mr. Kose said.

India is one example. The government has promised, and enacted, a series of policies that have galvanized investor confidence, including trimming bureaucratic hurdles, slashing fuel subsidies and allowing more foreign investment in some industries.

Although many investors say that work is yet unfinished, the country has now surpassed China as the world`s fastest-growing large emerging market, and economists, including the World Bank, are raising forecasts for India`s growth.

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07.06.2015 19:15 World Economy Review - May 2015

The world economy continues to heal at a disappointingly slow pace, the Organization for Economic Cooperation and Development said on Wednesday, but it predicted that growth should return to a healthier rate close to its long-term goal by the end of 2016.

“Global growth is improving, but it`s not good enough,” Catherine L. Mann, the organization`s chief economist, said in a conference call held before the release of the forecast by the O.E.C.D., the research and policy organization of the world`s richest countries. “It`s a B-minus performance.” The slow growth has had harmful consequences, Ms. Mann said, contributing to weak labor markets and rising inequality in many countries.

With energy prices relatively low and monetary policy accommodative, growth next year should reach 3.8 percent, she said. That would be the strongest level since before the 2008 credit crisis, Ms. Mann noted, though she expressed concern about the weak start to 2015 and the continued poor investment climate.

Ms. Mann said she expected global fixed investment, which she described as “a key component of potential output,” to increase by about 4 percent next year, the highest since the financial crisis started in 2008. Even that level would fall short of the amount needed to return labor markets to normal and raise living standards for those who have missed out on the recovery, she said.

She cited several risks, however, to that relatively optimistic picture. Among them are the Greek economic and fiscal crisis, which still remains unresolved; the possibility of a sharp slowdown in China; and the danger that financial markets will slump when the Federal Reserve begins raising interest rates.

The United States, which lost ground in the first quarter by one key measure — changes in gross domestic product - is expected to eke out an advance of about 2 percent for the year as a whole, accelerating to 2.8 percent next year, according to the O.E.C.D. forecast.

“U.S. growth projections remain weak compared with recoveries we`ve seen in the past,” Ms. Mann said. The organization projected that the Federal Reserve would raise interest rates to 2 percent by December 2016, from a current level near zero. Despite its relatively meager outlook, the United States economy, by most measures, continues to outperform nearly all other advanced industrial nations.

The Eurozone will also start to perk up, the O.E.C.D. forecast, growing 1.4 percent in 2015 and 2.1 percent in 2016, after a 0.9 percent expansion in 2014. It warned that high unemployment would continue to weigh on the euro currency bloc`s prospects, with only a gradual decline, to around 10 percent, by the end of 2016. The O.E.C.D. predicted that the European Central Bank and Bank of Japan would continue to hold rates near zero through the end of 2016.

The O.E.C.D. forecast that China, which has posted growth well above 7 percent in recent years, would fall short of that level, which is considered necessary to keep unemployment from rising. It said the increase in output could slow to 6.8 percent this year and 6.7 percent in 2016.

The organization, based in Paris, is the official research arm for 34 of the world`s most-developed economies, including the United States, the European Union`s 28 member states and Japan. Mexico and South Korea are members, but several nations with rising economies, including Brazil, China, India and Russia, have not joined.

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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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