EIU global forecast: Rich-world recovery
(Forecast closing date: October 14th 2013)
Despite a self-inflicted fiscal crisis in the US, continued austerity in Europe and relatively subdued momentum in China, global economic growth is poised to accelerate over the next 12 months. The euro zone is starting to sustain a weak recovery, and in 2014 the major developed markets will expand simultaneously for the first time in four years. However, political risk remains high in the US, and there is also a risk of severe disruption in emerging markets as US monetary policy shifts to a less accommodative path.
The Economist Intelligence Unit forecasts that global GDP at purchasing power parity exchange rates will grow by 3.6% in 2014. This is up from an estimated 2.8% in 2013, and largely reflects our positive expectations for the world's richest economies. We are raising our forecast this month for the euro zone in 2014, as the upturn seems to be spreading from stalwart Germany to France and even Italy. At the same time, we maintain our outlook for reasonably good growth in the US and Japan. The US government shutdown in October and the uncertainty caused by political wrangling over the "debt ceiling" are likely to reduce fourth-quarter GDP growth, but in many other respects the world's largest economy is performing well. Japan, meanwhile, is quietly benefiting from policy stimulus and improved sentiment, and even showing tentative signs of banishing deflation.
Our slightly more bullish view on the euro zone—we now expect GDP growth of 0.9% in 2014, compared with 0.7% in our previous forecast—does not alter our global forecast. But the improving outlook for the region marks a potentially significant transition. If our 2014 forecasts for the US, the euro zone and Japan all hold, these three economies will experience their first synchronised expansion since the 2010 bounce-back from the Great Recession. This should have positive spillover effects for the rest of the world. It will boost emerging markets' exports and prompt an influx of foreign investment as businesses in wealthy countries expand their footprints in the developing world. We forecast that outward investment by the US, the euro zone and Japan will climb by 10% in 2014, to about US$950bn.
These factors should offset some of the recent weakness in emerging markets, whose problems since May have been amplified by capital flight and currency depreciation. Investors' expectations of a scaling-back of the US Federal Reserve's quantitative easing (QE) programme prompted a major retreat from emerging-market risk in mid-year, although pressures have since eased. There are also signs that emerging markets have lost some of their dynamism of recent years. China's rates of GDP growth have slowed from their earlier stratospheric levels. Brazil is suffering from a combination of weak trading conditions, entrenched inflation and poor policymaking. Moreover, cyclical difficulties have highlighted fundamental problems in many countries, reflecting policymakers' earlier failures to implement structural reforms when their economies were more buoyant. While a number of emerging markets that slowed in either 2012 or 2013 will see growth pick up again in 2014, the once-popular idea that they could "decouple" from demand in the rich world was exaggerated.
Of the risks to global growth in the coming years, the most substantial remains the transition to less abundant liquidity. After pumping nearly US$3trn into the financial system in the past five years, the US Fed will soon reverse course. The US government shutdown has probably pushed back the date on which the Fed begins this process, but even if it holds off on "tapering" in December it is likely to start reducing its monthly asset purchases early in 2014. This would be a prelude to outright monetary tightening in the US and elsewhere over the next five years. An unwinding of liquidity is in many ways prudent and overdue, given signs that QE has contributed to asset-price bubbles. But it could spell turbulence for financial markets and emerging-market economies.
Recent events, unfortunately, have illustrated another way in which the US is a source of serious risk to the global economy. For several weeks, financial markets have lived with the possibility that partisan wrangling could prevent the US Congress from raising the federal borrowing limit or "debt ceiling", precipitating an unprecedented US sovereign default. Given the enormous size of the US Treasury market and its central role in the daily functioning of the global financial system, this would have been disastrous for the global economy. In the event—as we had predicted—on October 16th Congress passed a last-minute deal to end the government shutdown and authorise an increase in the debt ceiling that will cover the US government's costs for several months.
Developed world
Fiscal politics aside, the US economic recovery remains broadly on track, driven by consumer spending, exports and a pick-up in business investment. Real GDP grew by 2.5% at an annualised rate in the second quarter of 2013, up from 1.1% in the prior quarter. The housing market is recovering. However, job creation has slowed, and the recent jump in market interest rates will make borrowing costlier for consumers and businesses—acting as a brake on growth. We nonetheless expect real GDP growth of 2.6% in 2014, up from 1.6% this year.
Economic prospects in the euro zone are brightening, albeit from a miserably low starting-point. The currency union emerged from recession, after six consecutive quarters of contraction, in the second quarter of this year. The region's two largest economies, Germany and France, led the way but there were encouraging signs in Portugal, Spain and Italy. This suggests that the recovery—although tepid—is broadening. While we still expect real GDP to contract by 0.5% in 2013, growth will approach 1% next year, with the risks to this forecast on the upside.
Japan's economy continues to perform impressively, by its relatively sedate standards, aided by government spending, a resumption of QE and the weakening of the yen over the past year. GDP growth has slowed fractionally but business sentiment is at its highest level in almost six years. The sense that reflationary policies are having some traction is such that the prime minister, Shinzo Abe, is daring to go ahead with a politically risky hike in the consumption tax next April. The tax increase will temporarily depress demand in the second quarter of 2014, but the government has promised to offset this with additional stimulus. We forecast GDP growth of 1.7% in 2014, down slightly from 1.9% this year.
Emerging markets
Financial tensions have eased in recent weeks, and an upturn in the global economic cycle should boost performances in many major emerging markets next year. China is a notable exception. GDP data for the third quarter, due out on October 18th, will give a clearer idea of momentum, but for now the picture is pretty flat and we expect a slight downturn in growth in 2014, to 7.3% from 7.5% this year. The country's long-term shift towards slower, less investment-driven growth is also increasingly being felt. India, meanwhile, has seen its economic situation deteriorate considerably since May. Growth slumped to a four-year low in the April-June quarter, but the immediate sense of crisis in the economy—triggered by capital flight and a collapse in the rupee—has eased. A new central bank governor has moved to restore calm and the currency has rebounded from historic lows. A good monsoon will help GDP growth to recover to 5% in fiscal year 2013/14. However, the prospect of India sustaining 7 per cent‑plus growth over the next few years, which had appeared realistic until recently, no longer looks achievable.
Eastern Europe has felt the effects of the recession and debt crisis in the euro zone acutely, but it is now beginning to benefit from the weak upturn in its neighbour. The Czech Republic has returned to quarter-on-quarter growth after contracting for six quarters in a row. Poland's GDP also expanded in April-June, buoyed by exports. Russia has weaker links to western Europe and has continued to struggle, but a bumper harvest will boost the economy in the second half of 2013. Russian growth will pick up to 3.3% in 2014. Likewise, regional growth will accelerate next year, helped by stronger demand in the euro zone.
Latin America has endured a difficult first half to the year as countries that had previously proven resilient in the face of less favourable global conditions slowed appreciably. As elsewhere, the region has been affected by the retreat from emerging-market assets since May, prompting currency depreciation that has been only partly reversed. However, fears that this could generate serious inflationary pressures have proven unfounded so far. We expect regional GDP growth of 2.6% this year, picking up to 3.3% in 2014 as the global economy improves.
Political instability is hampering economic prospects in the Middle East and North Africa. Egypt remains under a state of emergency following the ousting of its democratically elected president, Mohammed Morsi, in July. Syria's economy has all but collapsed as civilians have fled the civil war and oil production has plummeted. Regional growth will recover to 4% in 2014, with prospects over the next few years boosted by infrastructure projects in the Gulf states. In Sub-Saharan Africa, growth will pick up from 3.7% in 2013 to almost 5% by 2015 as the global economy improves and as investment in oil and mining bears fruit.
Exchange rates
Many of the emerging-market currencies that depreciated sharply against the US dollar during the summer have regained ground in recent weeks, although most are still below pre-May levels. Brazil's Real, which fell by as much as 18% against the US dollar from early May to mid-August, has appreciated by about 12% since then. Market interest rates will continue to edge higher in the US in 2014, putting pressure on emerging-market currencies. The fact that US monetary policy is moving out of its ultra-loose posture also has implications for the major currency pairs. Over time the US dollar should rise against both the euro and the yen as interest-rate differentials widen. We forecast that the dollar will average US$1.28 against the euro in 2014, up from US$1.32 this year.
Commodities
Commodity markets have been weak since early 2013, reflecting concerns about the economic slowdown in China and the prospect of a pullback in the US Fed's QE programme (liquidity from which is widely thought to have boosted commodity markets). Industrial raw materials prices should stabilise in the final months of 2013 in anticipation of modestly stronger demand. Agricultural commodity prices are less likely to make gains given the improving supply picture. We expect the supply of crude oil to pick up in the final quarter of this year, suggesting that the market will be amply supplied moving into 2014. Political risk has kept oil prices higher than supply/demand fundamentals would suggest. Unless new geopolitical crises emerge, we expect a modest easing of prices from an average of US$108.5/barrel (dated Brent blend) in 2013 to just under US$105/b in 2014.
| World economy: Forecast summary | ||||||||||
| 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | |
| Real GDP growth (%) | ||||||||||
| World (PPP exchange rates) | -0.8 | 5.0 | 3.8 | 2.9 | 2.8 | 3.6 | 3.8 | 3.9 | 3.9 | 3.9 |
| World (market exchange rates) | -2.3 | 3.9 | 2.6 | 2.2 | 2.0 | 2.7 | 2.8 | 2.8 | 2.8 | 2.8 |
| US | -2.8 | 2.5 | 1.8 | 2.8 | 1.6 | 2.6 | 2.3 | 2.5 | 2.3 | 2.4 |
| Japan | -5.5 | 4.7 | -0.6 | 2.0 | 1.9 | 1.7 | 1.7 | 1.1 | 1.1 | 1.2 |
| Euro area | -4.4 | 1.9 | 1.6 | -0.6 | -0.5 | 0.9 | 1.3 | 1.4 | 1.3 | 1.5 |
| China | 9.2 | 10.4 | 9.3 | 7.7 | 7.5 | 7.3 | 7.0 | 6.9 | 6.3 | 5.9 |
| Eastern Europe | -5.6 | 3.5 | 3.9 | 2.1 | 1.7 | 2.9 | 3.6 | 3.9 | 4.2 | 4.3 |
| Asia & Australasia (excl Japan) | 5.1 | 8.5 | 6.5 | 5.3 | 5.5 | 5.7 | 5.8 | 5.7 | 5.6 | 5.6 |
| Latin America | -1.9 | 5.9 | 4.3 | 3.0 | 2.6 | 3.3 | 3.5 | 3.8 | 3.8 | 3.8 |
| Middle East & North Africa | 1.9 | 5.2 | 2.5 | 3.9 | 2.8 | 4.0 | 4.4 | 4.7 | 4.9 | 5.0 |
| Sub-Saharan Africa | 1.3 | 4.6 | 4.6 | 4.1 | 3.7 | 4.5 | 4.9 | 5.4 | 5.7 | 6.0 |
| World inflation (%; av) | 1.5 | 3.0 | 4.2 | 3.4 | 3.2 | 3.5 | 3.5 | 3.5 | 3.5 | 3.5 |
| World trade growth (%) | -11.7 | 14.0 | 6.3 | 2.4 | 3.3 | 5.2 | 5.0 | 5.3 | 5.3 | 5.4 |
| Commodity prices | ||||||||||
| Oil (US$/barrel; Brent) | 61.9 | 79.6 | 110.9 | 112.0 | 108.5 | 104.8 | 107.3 | 103.8 | 97.5 | 93.0 |
| Industrial raw materials (US$; % change) | -25.6 | 44.8 | 21.7 | -20.3 | -5.4 | 5.1 | 2.5 | 1.8 | 2.5 | 1.3 |
| Food, feedstuffs & beverages (US$; % change) | -20.3 | 10.7 | 30.1 | -3.5 | -7.8 | -6.4 | -1.5 | -1.8 | 3.7 | 2.4 |
| Exchange rates (annual av) | ||||||||||
| ¥:US$ | 93.6 | 87.8 | 79.8 | 79.8 | 97.4 | 101.2 | 103.0 | 102.0 | 101.0 | 100.0 |
| US$:€ | 1.39 | 1.33 | 1.39 | 1.29 | 1.32 | 1.28 | 1.26 | 1.26 | 1.27 | 1.27 |
| Source: The Economist Intelligence Unit. | ||||||||||
