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WORLD ECONOMIC UPDATE

31 August 2013

Since the IMF April 2013 World Economic Outlook (WEO), global growth is projected to come in at slightly above 3% in 20913, the same as 2012. Reasons include a more protracted recession in the Euro area and slowing of growth in certain key emerging markets

In May and June there was globally an increase in volatility after a period of stability

Advanced economies

There has been a rise in long term interest rates accompanied by higher volatility

Emerging market economies

These have been hardest hit as a result of recent increases in advanced economy interest rate and asset price volatility accompanied by weaker domestic activity further resulting in capital outflows, a decline in equity prices, higher local yields and CURRENCY DEPRECIATIONS – India/Indonesia

Growth

Growth has underperformed, increasing only slightly from an annualized rate of 2.5% in the second half of 2012 to 2.75% in first quarter 2013. WHY?

             major emerging markets have demonstrated continuing growth disappointments due to infrastructure bottle necks, capacity constraints, financial stability concerns and in some cases weaker policy support

             the recession in the euro area is deeper than was originally anticipated

             growth expansion in the USA has been weaker than expected

USA

Growth forecasts for the USA are for a rise of 1.75% in 2013 reaching 2.75% in 2014. Two factors are important here, how long the sequestration will remain in place and will solid private demand remain in place, the drivers here being rising household wealth resulting from the housing recovery and continued supportive financial conditions.

Japan

Expectations are for growth of 2% in 2013 moderating to 1.25% in 2014.

The Euro area

Continued recession in 2013 with activity contracting by at least .5% . 2014 expectations are for a growth increase of just over 1% which is weaker than previously expected.

                China

Growth should average 7.75% in 2013/14, slightly lower than expected as per April 2013 forecast.

New growth drivers

Policies are needed to increase efforts to achieve more robust growth.

Advanced economies

There is a need to pursue a policy mix that will bring in near term growth, anchored by credible plans for medium term public debt sustainability. This would allow a more gradual near term fiscal adjustment. Low inflation and sizable economic slack should allow monetary policy stimulus to continue until a recovery is achieved.

                The euro area

A bank review is needed to indentify problem assets and to quantify capital needs supported by ESM (European Stability Mechanism) direct capitalization where appropriate

There is also a need by policymakers to make progress on fuller banking union, which should include a strong Single Resolution Mechanism. There is also a need to reduce financial market fragmentation, to support demand accompanied by product and market reform which should drive new growth and create jobs

                Emerging market and developing economies

Policy tradeoffs here have been created by the prospect of monetary normalization in the USA with potential capital reversal flows. Weaker growth and potential legacy problems from prolonged periods of growth are to be noted here and will need new policies to address

There is an ongoing need for structural reforms in all MAJOR ECONOMIES to lift global growth and support global rebalancing.

CONCLUSION

Old risks remain

New risks on the downside continue to impacting global growth and these include an anticipated longer growth slowdown in many emerging markets economies, slowing credit and the possibility of much tighter financial conditions following indications by the USA Fed of an unwinding of monetary policy stimulus which will cause capital flow reversals in emerging markets such as what is happening in India now. In emerging markets there will be decision making as to making tradeoffs between macroeconomic policies in support of weak activity and polices to contain capital outflows.

Reference source : selected date from the IMF and World Bank

John Brooks

Trade Economist

The Auspacific Institute

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