NIESR’s Global Economic Forecast
World growth is expected to remain below trend at 3.1 per cent in 2012 and 3.4 per cent in 2013.
- The Euro Area is forecast to contract by 0.5 per cent this year and grow only marginally next year with unemployment reaching ‘depression-era’ rates in some periphery economies. The US is likely to grow by 2 per cent in each year.
- Growth in Brazil, Russia, India and China will be below long-term potential next year, although ‘hard-landings’ will be avoided; the impact on advanced economies will be offset by a large gain in competitiveness.
- Debt to GDP ratios in OECD countries will, on average, be higher in 2014 than at present.
It is now five years since the beginning of the financial crisis began and the world economy is yet to show signs of a broad self-sustaining expansion. In the advanced economies unemployment is at its highest rate for thirty years and the fast growing emerging economies have also slowed. Some European countries have ‘depression-era’ unemployment rates with no sign of improvement. If there are any bright spots, they are that the world’s largest economy is no longer at the centre of the crisis and the inventory cycle is likely to provide some short-term support to world demand.
Bold monetary policies by the Federal Reserve and the European Central Bank have reduced but not eliminated tail-risks. The most likely scenario is that the Euro Area survives intact; the Outright Monetary Transactions (OMT) scheme has reduced the probability of a nation being unable to rollover its sovereign debts and led to an improvement in the spread of periphery versus core Eurozone country sovereign bond yields. But the success of the scheme ultimately depends on the conditionality attached to new support and whether any discipline can be imposed on larger countries (such as Spain and Italy) if they are unable to meet the conditions. A further risk is how the emergency monetary policy measures in the Euro Area, US (and UK) are ultimately reversed without destabilising inflation expectations.
Brazil, Russia, India and China (BRICs) provided essential support to the world economy in the worst of the global financial crisis, but growth in all four countries has slowed noticeably this year. A critical issue is whether this marks the start of a more protracted downturn which would make recoveries in the West even more problematic. We expect the BRIC countries will avoid ‘hard-landings’, but growth will be below long-term potential in 2013. Some substitution towards advanced economy markets may arise from a large appreciation in their currencies.
Despite fiscal consolidation we expect debt to GDP ratios in most industrialised countries to be higher in 2014 than at the end of this year. The root cause of this weakness is the lack of an appropriate policy response to the impaired global financial system which is limiting the effectiveness of monetary policy and slowing the necessary deleveraging in the private sector. The vulnerability of the global financial system is reflected in the vast accumulation of cross-border gross exposures in assets classes which are opaque and poorly understood.
Have Your Say
Rate this feature and give us your feedback in the comments section below