INSIGHT: Global agencies cautiously forecast more growth in 2014

16 January 2014 18:18 Source:ICIS News

By Joe Kamalick

Top agencies see blue skies but clouds too for global economyWASHINGTON (ICIS)--Leading global economic and financial agencies this week offered a positive if conditional forecast for worldwide growth in 2014, cautioning that the slow recovery remains vulnerable to rising interest rates, volatility in capital flows and potential deflation.

In its annual analysis called Global Economic Prospects (GEP), the World Bank said that the global economy is at a turning point and is expected to strengthen further this year.

The bank’s analysis sees “growth picking up in developing countries and high-income economies appear to be finally turning the corner five years after the global financial crisis” of 2008-2009.

World Bank group president Jim Yong Kim said that “Growth appears to be strengthening in both high-income and developing countries, but downside risks continue to threaten the global economic recovery”.

“The performance of advanced economies is gaining momentum,” he said, “and this should support stronger growth in developing countries in the months ahead.”

The GEP analysis predicts global GDP growth in 2014 to improve to 3.2% from the mediocre pace of 2.4% in the year just ended.

Worldwide GDP performance should edge up to 3.4% in 2015 and to 3.5% in 2016, “with much of the initial acceleration reflecting stronger growth in high-income economies”, the bank’s outlook said.

While growth in developing nations is expected to continue this year and the year ahead, the pace of expansion will be slower than earlier expected but should meet 5.3% this year.

In high-income industrialised nations, said the bank, constraints on growth from fiscal consolidation - especially in Europe - will ease, helping to boost economic growth from 1.3% in 2013 to 2.2% this year and stabilising at 2.4% through 2015-2016.

After two years of contraction, growth in the euro area is projected to be 1.1% this year, climbing to still weak expansion rates of 1.4% and 1.5% in 2015 and 2016 respectively, according to the World Bank.

The US economy is expected to do much better, increasing from its below-trend GDP growth rate of 1.8% in 2013 to 2.8% this year and reaching 2.9% in 2015 and 3% in the following year.

Since the end of World War II, the US economy has generally expanded (other than in recession years) at an annual rate of 3% to 3.5%, a pace that economists regard as “trend growth” in normal economic times.

World Bank chief economist Kaushik Basu said that “Global economic indicators show improvement”.

“But one does not have to be especially astute to see there are dangers that lurk beneath the surface,” he said.

Those include the risk of fast-rising interest rates as the US and other major western economies ease back on stimulus efforts, and a worrying potential for deflation.

In a parallel global outlook, International Monetary Fund (IMF) managing director Christine Lagarde said that the world’s economy will see improvements this year, but she cautioned that significant financial risks and fiscal rough waters still threaten.

In a speech in Washington just days before the IMF is to issue its official 2014 outlook, Lagarde said that “there is optimism in the air” and world economies can anticipate a brighter horizon in months ahead.

She noted, however, that nearly seven years after the world in 2008 was plunged into the greatest financial calamity since the Great Recession, “this crisis still lingers”.

“Getting beyond the crisis still requires a sustained and substantial policy effort, coordination and the right policy mix,” she said, warning that central banks worldwide should be careful about rolling back stimulus efforts too soon, too fast or too much.

She said that the global economy “strengthened in the latter half of 2013, and should strengthen further in 2014 - largely due to improvements in advanced economies”.

In contrast, she said, growth in “a growing number of emerging markets is slowing down”, meaning that global expansion will depend more now on advanced economies than in recent years when the world’s overall growth was in large part sustained by those now slowing emerging economies.

In addition, “Even for the advanced economies, the outlook is still subject to significant risks” and “global growth is still stuck in low gear”, she said.

“With inflation running below many central banks’ targets, we see rising risks of deflation, which could prove disastrous for the recovery,” she added.

“Overall, the direction is positive” for the world’s economy this year, she said.

“But global growth is still too low, too fragile and too uneven,” she said, adding that the current pace of worldwide expansion “is not enough to create jobs for the more than 200m people around the world who need them”.

She cautioned that as economies in advanced nations continue to gain strength, “central banks should return to more conventional monetary policies only when robust growth is firmly rooted”.

In particular, Lagarde cited recent moves by the US Federal Reserve Board to begin easing back on its longstanding stimulus measures, a process known as “tapering”.

“The reaction to the Fed’s tapering has been calm so far, and this is good news,” she said.

But, “We also see risks arising from financial market turbulence and the volatility of capital flows”, she said, adding: “There still could be some rough waters ahead”.

That said, Lagarde’s outlook for the US and global economies is more sanguine than just six months ago when in June last year she warned that the world economy could be entering a soft patch and she lowered her forecasts for US growth in 2013 and this year.

And as recently as October last year, Lagarde cautioned that worldwide financial crises likely will become more probable and more severe.

The IMF was established in the closing days of World War II to promote international monetary cooperation and stability, foster economic growth and employment and to provide financial assistance to countries to help ease balance of payments problems.

Also formed at war’s end, the World Bank provides low-interest loans and grants to developing countries to support investments in government and private sector projects focused on education, health, infrastructure and agriculture.

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy
Bookmark John Richardson and Malini Hariharan’s Asian Chemical Connections blog

By Joe Kamalick