With recovery prospects flagging in many countries, central banks are flooding the global economy with cheap money in an effort to revive growth. The first two weeks of May saw a wave of interest-rate cuts, betraying policymakers’ concerns about the growth environment. The extent to which monetary easing remains effective given the current climate is debatable, but the global economy is slowly repairing itself following the crises of the past few years. The Economist Intelligence Unit envisages at least some pick-up in momentum in major economies later in 2013, which will set the stage for a better 2014.
Our latest monthly forecast maintains the qualified narrative of recovery that we have set out in recent months, with slight revisions to specific projections. Most notably, we have adjusted our forecasts for growth in the US, Japan and China. Overall, we still expect world GDP at market exchange rates to grow by 2.1% in real terms in 2013, the same as in 2012. (On a purchasing-power parity or PPP basis, the picture is slightly brighter, as this measure gives a higher weighting to faster-growing emerging markets.)
Conditions in many economies are weaker than they were at the beginning of this year. China’s GDP growth eased to 7.7% year on year in the first quarter of 2013, from 7.9% in October-December. First–quarter growth in Russia was just 1.1%, the slowest pace since 2009. Above all, the euro zone’s economic woes still loom large. While the risk of a catastrophic break-up of the European single currency has subsided in the short term, debt and austerity are severely impeding growth. Unemployment is at record levels, and even previously resilient “core” economies such as France are showing more signs of stress. The uncomfortable truth is that the global economy cannot do well if its largest single economic bloc—the euro zone—is in recession.
The picture is not entirely discouraging, however. China will very probably grow faster in the next couple of quarters than it did in the first three months of the year, as the effects of recent rapid credit growth and a resurgent property market kick in. And we continue to expect a relatively good showing for the US economy, where fears of a spring slowdown have melted away as weak jobs data have been revised upwards. Fiscal tightening may yet dull the recovery and its effects should not be underestimated, but the economy grew at a healthy rate in the first quarter and consumer spending was buoyant. We see the main risks to our US forecast as being on the upside, and expect growth to be approaching or surpassing 3% towards the end of the year.
Policy is also playing a role in the global recovery. Financial tensions in the euro zone have eased tremendously in recent months following a pledge by the European Central Bank (ECB) of unlimited intervention in sovereign bond markets. The new scheme has yet to be used in anger, but its mere existence has worked wonders. The ECB also cut interest rates in early May, a move widely emulated elsewhere. Central banks in South Korea, Australia, Poland, India and Denmark have lowered interest rates recently, and cuts are likely in various other countries. At the same time, quantitative easing (QE) in the US, Japan and the UK has had a dramatic impact on policy thinking and investor behaviour, boosting asset prices. Yet abundant liquidity has done relatively little so far to improve global growth. Weak banks, entrenched unemployment and high levels of indebtedness have disrupted monetary policy transmission. But the situation is improving. Borrowing is rising in some countries, banks are repairing their balance sheets, and companies are taking advantage of historically low interest rates to raise record amounts of cash. As central bank liquidity supports these and other post-crisis adjustments, economic growth should begin to rise. We expect global GDP growth of 2.8% at market exchange rates (and 3.8% at PPP rates) in 2014.
Developed world
US growth accelerated to 2.5% at an annual rate in the first quarter of 2013, up from just 0.4% in the fourth quarter of 2012. Somewhat surprisingly, the economy appeared to take in its stride the fiscal tightening that began at the start of 2013 and accelerated in March. Spending cuts and other budgetary measures will almost certainly take some of the steam out of the recovery. But housing and construction are strengthening noticeably, the stockmarket is at record highs and business investment appears to be holding up. We forecast real GDP growth of 2.1% in 2013, rising to 2.5% next year.
In the euro zone, the story remains one of contrast between improved financial conditions and crisis in the real economy. Borrowing costs for risky “peripheral” euro states such as Spain, Portugal and even Greece have been mostly stable or declining since the beginning of 2013 and are now far below their crisis highs in mid-2012. The recent jitters over Cyprus’s bail-out also seem to have died down. But political differences mean that little progress has been made on structural reforms, such as the creation of a banking union. Meanwhile, the growth situation remains grim, with the ECB’s latest rate cut likely to have only a minimal effect. We forecast that GDP in the euro zone as a whole will contract for a second year in a row in 2013, before a return to weak growth of 0.6% next year.
Japan’s economic outlook has been reshaped by the change of government that returned the long-dominant Liberal Democratic Party to power in December last year. The new prime minister, Shinzo Abe, is promoting a more aggressive pro-growth and anti-deflation agenda, and is also seeking to open up the economy to free trade. So far his programme, popularly dubbed “Abenomics”, has had the biggest impact on monetary policy. The central bank, also under new leadership, has shifted to a radical reflationary agenda in which the monetary base will double by end-2014. Partly because of the boost to exports from a weaker yen, we have revised up our growth forecasts and now expect real GDP growth of 1.2% this year, rising to 2.1% in 2014.
Emerging markets
Emerging markets have been feeling the effects of weak demand in the advanced economies with which they trade, and on which some rely for credit and investment. In Asia, the key story remains the slowdown in China. First-quarter GDP was weak by China’s elevated standards, and subsequent indicators have reinforced the picture. Having lowered our growth forecast a month ago in an initial response to official GDP data on April 15th, we have further downgraded our outlook slightly following closer analysis of the numbers. We now expect growth of 7.9% in 2013 (down from 8%) and 7.7% (previously 7.8%) next year.
Eastern Europe continues to struggle, held back by recession in the euro zone and continuing adjustment to the bursting of the credit bubble in 2008-09. Deleveraging by western European banks, in response both to the euro debt crisis and to tougher capital requirements, is cutting credit lines to the region, dampening growth prospects. Receding financial strains in the euro zone should remedy this situation to a degree, but depressed demand within the currency union means that there will be little relief for eastern European exporters. Even countries such as Russia, whose fortunes are less strongly tied to those of the euro zone (and which has benefited from high energy prices), have seen a marked slowdown. For the transition economies of eastern Europe as a whole, we forecast real GDP growth of 2.1% this year, picking up to 3% next year.
Growth in Latin America slowed substantially in 2012, with the region’s largest economy—Brazil, which accounts for around 40% of overall GDP—among the countries worst affected. The unexpectedly weak first-quarter performance of China raises concerns for South American commodity producers, and this month we have again downgraded our growth forecast for Brazil in 2013-14. Nonetheless, we continue to view the Latin American slowdown as cyclical rather than structural, and expect regional growth to pick up to 3.5% this year and to 3.8% in 2014.
Political instability continues to hamper economic prospects in the Middle East and North Africa (MENA). Egypt’s post-revolution government is grappling to keep the economy afloat, while Syria’s civil war threatens to spill over into neighbouring countries. Economic growth in MENA will weaken in 2013, depressed by a further contraction in Iran’s economy and some curtailment of previous expansionary fiscal policies. However, the headline figure for 2013 masks a considerable divergence between positive prospects for oil-producing countries (except for Iran) and mostly negative prospects for non-oil-producing states. Despite the relatively gloomy external backdrop, we expect Sub-Saharan Africa to grow by 4.2% in 2013 and 4.7% in 2014. Rising hydrocarbons output and new mining production should boost growth in several countries, and foreign direct investment will also prove beneficial.
Exchange rates
The outlook for currency markets is changing. In part, this reflects the weakening of the Japanese yen in response to monetary policy in Japan. It also reflects an apparent lessening of the impact on the US dollar of the so-called risk-on, risk-off trade, a strong factor in the dollar’s movements in recent years. This trade involved investors selling safe-haven dollars whenever the outlook for the global economy improved, and returning to the dollar whenever risk appetite retreated. This pattern now seems to have weakened, with investors steering a middle course between the two positions. Instead, the US dollar is rising against other major currencies because the US economy is outperforming its peers to a noticeable degree. With the euro zone in a rut, we remain mostly bullish about the US dollar, which we expect to average US$1.31:€1 in 2013 and US$1.29:€1 in 204. This is unchanged from our last forecast. However, we are likely to take down our yen:US dollar forecast for 2013, currently at ¥98.3:US$1, in the coming months to take into account further yen weakness.
Commodities
Commodities suffered a sell-off in mid-April, in response to weak economic data and a brief, Cyprus-related bout of investor jitters over the euro. Gold was the worst-performing commodity, but base metal prices also fell sharply. Given our forecast of a stronger global economy in the second half of 2013, we expect the second quarter of this year to represent the trough for commodity prices, which should then start to come back later in the year. Oil (dated Brent Blend) will average US$106.6/barrel in 2013. Our oil-price forecast is unchanged. In contrast, we have lowered our forecast for industrial raw materials prices in 2013, to reflect the recent market sell-off. Industrial raw materials prices will be essentially flat this year, but will rise a bit more strongly than previously forecast in 2014.
