November 12, 2014

The World on two pages – November 2014

Global growth remains moderate and sub-trend with big variations between key economies. China and North America represent around one-third of global GDP but they currently account for around half of global growth.

Global: Global growth remains moderate and sub-trend with big variations between key economies. China and North America represent around one-third of global GDP but they currently account for around half of global growth. By contrast, Japan and the Euro-zone are the main drags on the global economy, accounting for one-sixth of world output but contributing very little to global growth. Low interest rates, less fiscal retrenchment, lower oil prices and a gradual recovery in investment in India should produce an acceleration in global growth from this year’s 3% to 3.4% in 2015. Although the US and UK upturns look solid, the emerging markets economies continue to drive around three-quarters of the increase in global output in 2014 with China and India contributing around half, but that share should trend down.

  • Divergence in economic conditions between the big advanced economies has been highlighted in recent central bank decisions on monetary policy. The US Fed is carefully and gradually moving toward less easy monetary policy while the Bank of Japan (BoJ) has eased again. The US Fed has decided to stop increasing its balance sheet through net purchases of Treasury and agency securities and it has outlined its plans for how US monetary policy will be “normalised”. This will eventually involve interest rate increases but the Fed still says it should keep rates unchanged for “a considerable time”. By contrast, the Bank of Japan has just ratcheted up its already massive purchases of Government bonds, aiming to inject even more liquidity to hopefully achieve its 2% inflation target. This divergence is also seen in Europe with pressure on the ECB to do more to curb deflation while the discussion at the Bank of England is over when rates should be increased.
  • Global economic growth appears to be continuing at a moderate pace. Sluggishness in world trade growth is broad-based and the sub-1% growth rate in advanced economy exports shows the limited prospects facing countries hoping to rely on export-led growth to offset weak domestic demand. October business surveys show the divergence between the big advanced economies continuing, with improving conditions in the US and UK and weakness in the Euro-zone, although a few of the surveys are showing an upturn in Japan. A major factor holding down the advanced economies has been weak growth in real household incomes/wages. There are big differences between economies, with signs of an upturn in wage growth in the US, Germany and Japan, but a downward trend in wage growth in the other big European countries.
  • Although G7 Advanced economy annualised growth quickened in June, it could well have slowed in September. Early measures of third quarter US and UK GDP growth, while still solid, were weaker. The Japanese economy is still struggling to digest the impact of the April rise in consumer taxes along with disappointing export outcomes. Business sentiment in the Euro-zone trended down through the six months to September, not a favourable sign for output. The October business surveys still show the strongest results in the UK and US across both manufacturing and services. Euro-zone purchasing manager survey readings have been trending down since the middle of the year and the European Commission survey showed a similar pattern until October, when it picked up slightly. The surveys also show a generally soft picture for the Japanese economy, although again some surveys are weaker than others and there is a slow recovery from the weak post-tax rise readings.
  • Industrial growth in the emerging market economies is well below its long-term average, but double the pace seen in the advanced economies. Emerging Market Economy export growth is also well below its long-run performance. Growth performance varies considerably among the emerging market economies. Outside of the volatile trade data, most of the Chinese monthly economic indicators (and the quarterly national accounts) show a gradual slowing in growth. Most of the recent Indian data shows a trend upturn after some weak years. Higher imports point to increased domestic demand, while some of the business surveys are finally signalling better conditions. Latin America is showing greatest weakness – Q2 GDP fell in both Brazil and Argentina, minimal growth in regional $US exports and falling industrial output.
  • Recent indicators remain consistent with our forecast for continued moderate sub-trend expansion: global growth expected to increase from 3% in 2014 to 3.4% next year. The strength of economic activity is patchy between regions, which is increasingly going to be reflected in monetary policy and currency markets. Historically low interest rates in big advanced economies, a relative slowdown in the pace of fiscal retrenchment and a gradual recovery in private sector willingness to invest (as risk fears recede) will assist the expected upturn. The recent fall in oil prices should also boost global economic activity.

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