Australia & the World on two pages – August 2013

Central bank statements reinforcing their guidance that interest rates should stay low for a long time yet across the big advanced economies, have supported financial markets. Recent business surveys and industrial data point to an upturn in growth in these advanced economies

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Global: Central bank statements reinforcing their guidance that interest rates should stay low for a long time yet across the big advanced economies have supported financial markets. Recent business surveys and industrial data point to an upturn in growth in these advanced economies, possibly heralding the start of the shift in the composition of global growth away from the emerging markets and toward advanced economies. While USA growth is lower, an accelerating trend is expected to see “tapering” begin in coming months. Against that, business surveys, trade and industry data and GDP releases show a softening trend in the emerging markets. We also expect slower Chinese growth to continue into 2014.

  • The consensus view has long been that annual global economic growth should increase from 3% to around trend (which is between 3½% and 3¾%) over the next year or two. Set against this forecast, the performance of the global economy through the last couple of years has been disappointing with few signs until recently that the anticipated ramping up of world economic growth was about to start. The last few months have finally brought some early evidence that things could be getting better. Some of this rotation reflects the passing of prolonged periods of economic weakness in Western Europe, some is due to the stimulus coming from Abenomics to Japanese demand while, in the background, a moderate US recovery continues.
  • As there is still plenty of spare capacity in the big advanced economies, supply should not be much of a constraint on their predicted economic upturn. This idle capacity limits pricing power in labour and product markets, ensuring inflation stays down, thus allowing central banks to keep their policy interest rates at historically low levels.
  • Second quarter trends in GDP for the US and UK have been reasonably positive, partial data for Japan suggests continued growth and some of the recent economic indicators in the recession-hit Euro-zone are looking less negative. The most marked evidence of improving economic conditions comes in the business surveys where the latest monthly purchasing manager surveys show a solid improvement across the US, UK and Euro-zone (but the Japanese upturn faltered in July). The combination of fiscal stimulus, central bank asset purchases and a lower yen appears to have triggered an upturn in Japanese economic growth, with exports, consumer spending and business conditions all moving up. However, there have been a few recent setbacks and markets are watching to see if growth momentum can be maintained.
  • While economic conditions across the big advanced economies are looking more promising, the growth performance of the large emerging market economies has been disappointing. Chinese growth slipped from double-digit levels in 2010 to 7.5% yoy in June 2013 and quarterly growth in the second quarter was running at 1.7%. India has also slowed markedly with growth halving from around 10% in the first half of 2010 to around 5% yoy in early 2013. The emerging market slowdown extends beyond China and India, stretching from the export oriented economies of East Asia to even a big closed Latin American economy like Brazil where growth of only around 2% is expected this year. This weakness reflects subdued world trade and the exhaustion of previous credit-led growth models in places like Brazil and S Korea.
  • Recent signs that growth is picking up in the big advanced economies fit in with the re-balancing of global growth toward those nations that we have been predicting for some time and which business seems to be expecting. Eventually the still weak economic conditions in Western Europe have to improve, Abenomics should boost demand in Japan while the gradual US economic upturn trundles on. The upshot is that growth in the big advanced economies should rise from just over 1% this year to 2¼% in 2014.
  • While recent indicators look brighter for the advanced economies – and we have modestly revised up our 2013 forecasts for the UK and Japan- they look less rosy for some of the big emerging markets and we have slightly lowered our forecasts for China and India. Emerging economy growth is only expected to accelerate modestly through the next few years – from 5¼% in 2013 to 5½% by 2015, mainly because of an upturn in world trade that drives emerging Asian exports, monetary easing in India lifting its demand and faster expansion in Latin America. Taken overall, world economic growth is expected to rise from 3% this year to 3.6% in 2014 and 3.7% in 2015, which is back around its long-term pace.

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