September 11, 2014
The World on two pages – September 2014
Weakness in Japan, stagnation in the Euro-zone and a hard landing in Latin America have resulted in a slowdown in the pace of global growth through the first half of 2014. World GDP growth reached 3.4% yoy in late 2013, it slowed to 3.1% yoy in March qtr 2014 and 2.9% yoy in June qtr.
Global: Weakness in Japan, stagnation in the Euro-zone and a hard landing in Latin America have resulted in a slowdown in the pace of global growth through the first half of 2014. World GDP growth reached 3.4% yoy in late 2013, it slowed to 3.1% yoy in March quarter 2014 and 2.9% yoy in June quarter. We have trimmed our 2014 global forecasts to take account of weaker than expected June quarter data in the Euro-zone and Latin America (Brazil, Argentina). Economic upturns look secure in North America and the UK, Indian growth has finally picked up and we may revise our numbers higher, China’s gradual slowing continues and we are counting on monetary stimulus to eventually get faster growth in the Euro-zone and Japan as the latter’s tax rise effects wear off.
- After a long period of stimulatory monetary policies in all of the big advanced economies, growing divergence in their economic outlooks should lead to variations in central bank interest rate policies and that should impact on currencies (higher $US). The US Fed appears convinced that sustained moderately paced growth should continue. Fed guidance has rates staying low “for a considerable time” after the Fed finishes its asset purchase program (in October). The Bank of England has also stopped loosening policy with some MPC members now voting for rate rises. Elsewhere, the Bank of Japan has confirmed that it will continue its zero interest rate and big asset buying programmes for as long as necessary to get its 2% inflation target. Facing deflationary risks and a sluggish Euro-zone economy, the ECB announced another easing in its monetary policy with a 10 bp cut to its policy rates (taking its refi lending rate to 5 bps) and plans to buy assets to boost its balance sheet to early 2012 levels (implies a €1 trillion rise).
- Global industrial growth has remained in the 2¾ to 3% yoy range since late 2013 as robust Chinese manufacturing expansion and the start of cyclical upturns in India and across the emerging market economies of East Asia offset weakness in Japan, the Euro-zone and Latin America – helping to support global commodity demand. Weakness in Japan and the Euro-zone explains mid-2014s sharp downturn in industrial growth in the advanced economies – previously their rate of expansion had matched that of the emerging market economies. However, overall, business surveys in the advanced economies have continued to trend up. This reflects solid outcomes in the US and a partial recovery from a post-tax-rise slump in Japan. Readings across Western Europe are still weakening.
- Although G7 advanced economy annualised growth quickened in June, 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. June quarter’s divergence in output growth between the US/UK and Euro-zone/Japan continued a divergence in performance dating back to early 2013. The monthly purchasing manager surveys provide one of the more timely measures of growth momentum and the August results show the solid US performance continuing into the third quarter. Elsewhere, results are mixed. Industry is still growing in the UK and Euro-zone, but more slowly. UK services look even stronger while the Euro-zone services sector has lost momentum. National business surveys across the Euro-zone also point to weakness. The August purchasing manager surveys for Japan show output struggling to regain its pre-tax rise level in both services and industry.
- Emerging market growth has slowed from 6% yoy in mid-2013 to 5.3% in June 2014 and the slowdown has been broadly-based with softer growth in China, the rest of East Asia and a particularly hard landing for Latin America. India is the only big emerging market economy that has gone against the trend: its monthly indicators of trade and output have turned upwards, business surveys look more positive and leading indicators suggest faster growth. Unlike its quarterly national accounts, Chinese monthly activity indicators are consistent with a very gradual trend slowing in growth, but conditions are mixed across the economy.
- With the upturns in the US, UK and Canada looking securely established and monetary stimulus in Japan and the Euro-zone finally helping their economies, we expect advanced economy growth to pick up in 2015 and 2016. The lacklustre responses to forward looking questions in Euro-zone national business surveys suggest that its upturn will be muted. Emerging market growth should also pick-up as faster expansion in India, Latin America and East Asian emerging market economies outweighs China’s slowing trend growth. Global growth should accelerate from 3% in 2014 to 3½% next year and 3¾% in 2015 – taking it back to around its long-run trend.
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