October 15, 2014
The World on two pages – October 2014
Global growth was around 3% in the first half of 2014, below trend and with marked variations in performance between major economies. North America continues to perform strongly with solid growth in both the US and Canada.
Global: Global growth was around 3% in the first half of 2014, below trend and with marked variations in performance between major economies. North America continues to perform strongly with solid growth in both the US and Canada. Although the UK’s pace of growth could have peaked, it continues to run at a solid rate while recovery in Japan and the Euro-zone has faltered. Conditions are mixed across the emerging market economies with an upturn in India after some disappointing years, continuing trend slowdown in China, falling output in key Latin American nations like Brazil and Argentina and sluggish growth across most of emerging market East Asia (as the weakness of growth in world trade affects export-driven Asian economies). Global growth should quicken next year to a still sub-trend 3.4%, largely driven by the US and India.
- There is a growing divergence in monetary policy across the major central banks. The US Federal Reserve seems confident that moderate economic growth will continue and that inflation should be at or below the 2% goal by 2017, allowing for a gradual tightening in policy. The Fed’s asset buying program is nearing its end but the fed funds interest rate should remain unchanged for a “considerable time” (rate hikes to commence in mid-2015). In contrast, softer than expected activity in Euro-zone and Japan has constrained inflation pressures, keeping rates and bond yields exceptionally low. Deflation is a risk in the Euro-zone and the Bank of Japan is still trying to escape deflation by getting inflation up to 2% as soon as possible (but core inflation is only 1¼% yoy). Neither the ECB nor the Bank of Japan looks set to end their asset buying programmes soon and a lift in their policy interest rates is probably still years away. Divergent economic and policy conditions are fuelling the long awaited $US appreciation.
- Softness in economic activity in the Euro-zone, Japan and Brazil alongside the trend slowdown in China has offset solid growth in North America and some recovery in India. The result has been a slowing in the pace of global industrial growth through 2014. This slowing, concentrated in post-tax rise Japan and the Euro-zone, mirrors a winding back in confidence levels seen in business surveys, although the results are still consistent with ongoing moderate growth. Global growth in services output has also slowed recently, mainly reflecting lower Japanese spending in the wake of the April tax hike and a slowdown in the Euro-zone. Services output continues to grow rapidly in the UK and big emerging market economies like China, India and Indonesia. Recent business surveys show a modest slowdown in global service sector growth in Q3.
- Although G7 Advanced economy annualised growth quickened in the June quarter, almost all of this occurred in North America (plus a very small contribution from the UK) while Japanese output fell and Euro-zone production stagnated. Recent business surveys point to continued growth in the big advanced economies, but suggest a loss of momentum in the September quarter. Nevertheless, the surveys show a marked difference across the big advanced economies. The principal concern at present is the extent to which advanced economy growth is being driven by just one big economy – the US – with recent GDP releases, partial economic indicators and surveys highlighting continued weakness in Japan and the Euro-zone.
- Emerging market economies are growing much faster than the advanced economies, but the pace of expansion has steadily eased. Latin America has seen the sharpest slowing, with GDP falling in both Brazil and Argentina in Q2 – confidence in the latter was hit by a default on its external debt. India has picked up through mid-2014. In contrast, Chinese growth is gradually slowing and growth across the rest of emerging East Asia has gradually eased and is well below long-run average growth. The monthly economic indicators show emerging economy industrial growth running around the trend pace seen through the last few years but well below pre-GFC levels. World trade growth remains sluggish, but exports growth from emerging market economies has accelerated, largely reflecting better Chinese exports.
- Continuation of the economic upturns in North America and the UK looks reasonably assured, but the Euro-zone and Japan remain in doubt and we expect growth to remain modest for both; April’s tax hike hit Japanese growth harder than expected and another rise is planned for next October. Moreover, recent economic indicators in the core countries of the Euro-zone look disturbingly soft. Emerging market growth is expected to pick-up, reflecting stronger Indian growth and a recovery in Latin America. Global growth should accelerate from 3% in 2014 to just under 3½% next year and slightly over 3½% in 2016 – leaving it still slightly below its long-run trend. Consequently, inflation pressures will be limited, allowing central banks to keep policy interest rates low.
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