Global Economy Reviews

06.04.2014 12:35 World Economy Review - March 2014

Real gross domestic product (GDP) growth rate in the Organization for Economic Cooperation and Development (OECD) area slowed to 0.5 percent in the fourth quarter of 2013 from 0.7 percent the previous quarter as the buildup in inventories in Europe seen in the third quarter unwound.

“Destocking reduced GDP growth by 0.1 percentage point in the fourth quarter. The contribution from private consumption picked up to 0.4 percentage point, with rebounding net exports contributing a further 0.2 percentage point,” the OECD said. “The contribution from gross fixed capital formation fell marginally to 0.1 percentage point from 0.2 percentage point in the previous quarter.”

In all major European economies, destocking weighed down on growth, in part unwinding large buildups seen in the previous quarter.

In the United Kingdom, the main contributor to its GDP growth of 0.7 percent was a rebound in net exports, which stood at 1.0 percentage point. Investment and private consumption also provided positive contributions of 0.3 and 0.2 percentage points, respectively. However, significant unwinding of the stocks buildup in the previous quarter dragged down overall GDP growth by minus 0.8 percentage point.

In Japan, investment continued to be the main driver of its GDP growth of 0.3 percent, contributing 0.3 percentage point to the growth. Private consumption and government consumption followed, contributing 0.2 and 0.1 percentage points to the growth, respectively. “Net exports continued to offset these positive contributions, reducing them by 0.5 percentage point, the same rate as in the previous quarter.”

In the United States, the main contributor to overall GDP growth of 0.7 percent was private consumption with 0.6 percentage point, followed by net exports with 0.2 percentage point. “A slowdown in government consumption, which contributed minus 0.2 percentage point, partially reduced the country`s GDP growth.”

In Germany "a rebound in the contribution from net exports (of 1.1 percentage points) was the main driver of overall GDP growth of 0.4 per cent" but destocking was a significant drag to the extent of 0.8 percentage points. In France, private consumption and net exports contributed to growth of 0.3 per cent, but destocking reduced growth by 0.3 percentage points.

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10.03.2014 22:13 World Economy Review - February 2014

Experts at the National Institute of Economic and Social Research in a forecast have said that the world economy will grow by 3.7 per cent in 2014 and 2015, an improvement on the 3.1 per cent compared with that recorded last year.
The forecast was contained in the National Institute Economic Review for February 2014 which showed growth prospects as having improved in advanced economies, particularly in the US, but deteriorated in a number of emerging market economies.
The report stated that high unemployment rates coupled with moderate and uneven growth will raise the prospect of continuing below-target inflation and that this could greatly complicate macroeconomic policymaking.
“World growth is projected to pick up to 3.7 per cent in the next two years. The outlook has improved mainly in the advanced economies, and especially in the United States, but has been disappointing in the Euro Area and Japan, and has deteriorated in some of the emerging market economies,” the report said.
It also provided information on how monetary authorities have sought to provide some assurance that the current supportive policy stance will continue even as the recoveries become more entrenched, noting that fiscal policies are also less restrictive than in recent years in most of the advanced economies.
“Inflation in the advanced economies continues to decline. Sustained below-target inflation and more so deflation, poses a risk to our projections and could impede recovery in a number of ways. In particular, adjustment in the Euro Area would be more balanced and less costly if inflation were at its target on average, and above average in the core countries,” the report read.
Notably, the NIESR forecast noted that with the exception of the US, there has been only a small reduction in private sector debt burdens. This adjustment would be considerably more difficult in a deflationary environment.
It projected that better growth, very low borrowing costs and little pricing power in goods markets may lead to further appreciation of asset prices. This could complicate monetary policy stances and the associated forward guidance.
It reasoned whether central bankers` new tool box of macro- prudential measures can in fact contain such pressures against this backdrop remains to be seen.
The report specified that a further risk to the Euro Area relates to the design and implementation of the Single Resolution Mechanism, an integral part of a banking union.
“It is very difficult to see that the current proposals are either workable or credible. Until there is real progress on providing a pooled public back-stop, it is difficult to see how a credible banking union will emerge. With bank lending to the private sector already weak, this could be very damaging to prospects for continuing recovery,” the reported stated.
It posited that the outlook has worsened in emerging market economies: “The gradual slowdown in China is proceeding broadly as we expected, but near-term growth prospects for Brazil, India, Russia and a number of other emerging market economies have deteriorated, and financial pressures have appeared in Argentina, Russia, Turkey, and other countries. Since late October, official interest rates have been raised in Brazil, India, Indonesia, Turkey and South Africa.”
It also predicted that the volatility of capital flows to emerging markets may increase, as an adjustment in monetary policy in the advanced economies becomes a closer prospect and the financial imbalances in some emerging market economies are reassessed.
It pointed out those economies with external current account deficits that are not financed by long-term capital flows seem particularly vulnerable specifying that while China is not dependent on external finance, the lack of a robust financial system poses risks here too.

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07.02.2014 15:55 World Economy Review - January 2014

The International Monetary Fund raised its global economic growth outlook for the year, with expansion to be fueled by U.S., euro-zone and Japanese growth, though deflation and financial-sector risks threaten a full recovery. "The recovery is strengthening," though it is still weak and uneven, IMF Chief Economist Olivier Blanchard said as the fund released its latest World Economic Outlook report.
The IMF raised its 2014 global growth forecast to 3.7%, up 0.1 percentage point from its last outlook in October. Mr. Blanchard said the financial system is slowly healing, uncertainty among investors is abating and the drag from budget belt-tightening around the globe is decreasing.
Advanced economies are fueling the world`s economic expansion, unlike the years following the 2008 financial crisis when emerging markets were the primary drivers of global growth.
The U.S. leads the recovery. The IMF raised its forecast for U.S. economic growth this year by 0.2 percentage point to 2.8%, though it downgraded its 2015 outlook by 0.4 percentage point to 3% amid the fights in Congress over the federal balance sheet and spending.
The fund said the Federal Reserve`s plans to exit its easy-money policies are broadly appropriate, and it expects an increase in the Fed`s policy rate in 2015.
For Europe, however, officials warned that rising risks of falling prices threaten to stall the anemic recovery. Although the fund raised its growth forecast for the U.K., Germany and Spain, Mr. Blanchard said, "Southern Europe continues to be the more worrisome part of the world economy."
Exports are strengthening in the Southern euro-zone countries. But demand is slack, with weakness among banks and businesses. More budget tightening is needed as well, the IMF said, and unemployment remains at dangerously high levels, especially among youth.
To avoid a deflationary spiral that could reignite the euro zone`s crisis, the IMF said the European Central Bank can do more to stimulate growth in the 18-member currency union. The ECB should be prepared to act "if the next few numbers on inflation turn out to be weaker than they expect," Mr. Blanchard said, through measures including cutting interest rates or targeted injection of cheap cash for lending to small and midsize companies.
Estimating a 10%-20% risk of deflation, "it`s important for the central bank to commit to do anything needed to maintain inflation, thereby anchoring expectations, and to sustain demand," Mr. Blanchard said. Also, the ECB`s bank balance sheet review is likely the area`s most important short-term task, the IMF said.
For Japan, the IMF raised its growth forecast for the year by 0.4 percentage point to 1.7%. It said Japan`s government will continue to face the challenge of trimming its budget enough to reassure investors, while not slowing the recovery.
The fund also raised the growth forecast for the world`s No. 2 economy, China, by 0.3 percentage point to 7.5%. Mr. Blanchard said, however, that China`s need to contain escalating risks in the financial sector without excessively slowing growth will be a major challenge "and a delicate balancing act."
The IMF downgraded its outlook for many other major emerging-market economies. Most notably, it cut Russia`s growth forecast for the year by 1 percentage point to 2% and Brazil`s growth outlook by 0.2 percentage point to 2.3%.
Stronger growth in advanced economies should boost demand for emerging-market exports enough to offset an expected rise in borrowing costs as the U.S. Fed begins to wind down its easy-money policies this year, the fund said.
Still, Mr. Blanchard said that while some of the rise in interest rates has already been factored into investors` outlook for emerging markets, "we can expect complex capital movements across countries for some time to come."

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08.01.2014 20:21 World Economy Review - December 2013

The global economy may be entering a new phase as the year draws to a close. New data suggest some of the uncertainty that has characterized much of 2013 appears to be lifting as a new year begins, though economists are cautious. Despite steady improvement, U.S. unemployment remains high, Europe`s debt crisis is far from over, and China`s economy continues to slow.

As the year ends, more people are finding work in the United States, the economy is growing at the fastest pace in two years and Congress has a new budget that effectively removes the threat of another costly government shutdown.

Barring another political standoff, small business advocate John Arensmeyer sees an improved business climate in 2014. “Could be a better year than 2013, particularly if we don`t see the type of shenanigans we saw with the shutdown.”

Across the Pacific, China`s economy has slowed after decades of double-digit expansion. But even with a relatively modest outlook of seven percent growth, international economist Uri Dadush said China continues to exert strong economic influence in the region. “It`s going to be somewhat slower going forward over the next year or two, but still sufficient to pull a large number of countries along,” said Dadush.

But while improving demand is likely to benefit countries from Cambodia to Japan, European economies remain weak. The European Commission says growth will slow in the 18 nations that use the euro - with unemployment likely to inch higher in the new year. Despite recent banking reforms, Dadush said tough austerity measures in countries that received bailouts continue to weigh on Europe`s economy. “Italy`s in deep trouble, and it`s going to take some years even for the Spains and the Portugals and the Irish to come out of the mess,” said Dadush.

Lingering questions also remain about the international impact of the U.S. central bank`s decision to scale back monetary stimulus. With prices of raw materials likely to fall next year, economists say commodity-dependent countries could see their revenues fall. “That includes Brazil, but it also includes Turkey, it includes Hungary, it may include Indonesia, that is also commodity-dependent by the way,” said Dadush. In the Middle East, some of the Arab Spring countries, which remain politically unstable, are expected to experience economic difficulties in 2014.

Pinfan Hong, chief of global economic monitoring at the United Nations, said, “Nevertheless, we believe some improvements are building the momentum for next year. So we expect the world economy to grow by about three percent for 2014.”

2014 also bodes well for Africa. After expanding at an annual pace of 4.8 percent in 2013, the African Development Bank projects growth to accelerate to 5.3 percent, bolstered by strong growth in the service sector and increased agricultural and mining activity.

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05.12.2013 19:27 World Economy Review - November 2013

The Organization for Economic Cooperation and Development said world economic output would expand 2.7% this year and 3.6% in 2014. Those figures are down from the group`s May forecast of 3.1% growth this year and 4% next year. Global "outcomes this year and near-term prospects appear a little weaker than had been expected in May, at the time of the previous Economic Outlook," the OECD said.
The future of monetary stimulus in the United States has become a central risk worldwide, the OECD said, adding to long-standing problems, such as the fragility of eurozone banks and a decade of soaring Japanese public debt. The OECD urged the US Federal Reserve central bank to maintain its ultra-easy monetary policy for some time, and it suggested that the European Central Bank consider extra action to relax monetary conditions if deflationary pressures increased.
The OECD, which is composed of the world`s 34 most advanced economies, said growth in its member countries would be 1.2% this year and 2.3% in 2014, the same as forecast in May. Growth in advanced economies will pick up speed this year and next, but mostly at a slower pace than forecast as new risks loom, especially from emerging economies, the OECD said. Japan and the eurozone will do slightly better than expected in both years as austerity policies retreat, monetary stimulus is maintained and financial conditions improve, the OECD said. But the US economy will grow less quickly than forecast, with the OECD pointing to political dysfunction in Washington and the eventual tapering of monetary stimulus as factors that could hamper recovery.
The latest OECD outlook report said that old worries "have been augmented by new concerns, most notably the possibility of significant financial instability in advanced and, especially, (emerging economies) during the exit from unconventional monetary policies in the United States."
Moreover, the OECD warned, if political battles in Washington were to make a debt ceiling in the United States binding next year, the outcome could have "extreme" effects on the world economy. The forecast for US growth in 2013 was slashed to 1.7 percent from 1.9 percent, but edged up to 2.9 percent for 2014.
The OECD said that efforts to slow fiscal consolidation in the US and the eurozone were appropriate given slightly improving public finances and the uncertain economic outlook.
Japan on the other hand, must implement "strong fiscal tightening" in order to cut its debt. But despite this overhang, Japan`s recent efforts to jumpstart the economy will bear fruit with the OECD now forecasting 1.8-percent growth in 2013 instead of 1.6 percent. In 2014, Japanese growth will slow to 1.5 percent, hobbled by debt.
The OECD said that the eurozone still had the potential to unsettle the world economy and urged the currency bloc to press on with its banking union reform which includes a stringent stress test for banks. The OECD weakened its recession outlook in the currency area this year to contraction of 0.4 percent instead of 0.6 percent, and forecast growth of 1.0 percent in 2014.
The OECD said the UK would grow by 1.4% this year, an upgrade from its forecast in May of 0.8%. UK growth would accelerate to 2.4% in 2014, above economists` expectations of 2.2%, it said. It said signs of improvement were "particularly apparent" in the UK, and monetary policy was likely to remain "appropriate" for some time. The OECD also revised down its global growth forecast for 2014, which it now estimates at 3.6%. In May, it had forecast 4%. In a first estimate for 2015, it predicts growth of 3.9%.
China, less dependent on foreign funds, avoided the brunt of the tapering talk, but the OECD did lower the Chinese growth forecast to 7.7 percent this year, from 7.8 percent, and to 8.2 percent for next year.
In China, the OECD said growth was picking up "aided by a small fiscal stimulus and rapid credit expansion that did not slacken until June 2013" when state leadership changed hands. The OECD said that by past standards, "the recovery is subdued, reflecting a marked slowing in potential growth in the past few years".

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