June 2014

UN LOWERS WORLD ECONOMY GROWTH FORECAST

The rates are revised downward due to deterioration in the growth prospects of developing economies as well as those of transition economies.

By Kanaga Raja

Third World Network Features

            The world economy is expected to accelerate over the next two years, with updated growth rates of 2.8% in 2014 and 3.2% in 2015, the United Nations has reported.

            In its mid-year update of the ‘World Economic Situation and Prospects 2014', the UN said that these updated growth rates are slightly lower than its earlier forecast made in January.

            (In its January report, the UN had forecast the global economy to grow at a pace of 3.0% in 2014 and 3.3% in 2015).

            According to its latest report, a downward revision has been made mainly in the growth projections for developing economies and the economies in transition, as the situation in a number of countries in these two groups has somewhat deteriorated.

            With the projected growth rates of 4.7% and 5.1% for 2014 and 2015 respectively, developing countries as a whole will continue to contribute a large proportion to global growth.

            "However, this growth trajectory is lower by two percentage points than what the developing countries had registered for a number of years prior to the global financial crisis," said the UN, noting that the downward revision in the growth for the economies in transition is even more pronounced.

            As demonstrated in the two recent episodes of financial turbulence in mid-2013 and early 2014, a number of developing countries are vulnerable not only to the international spill-overs from the adjustments in monetary policies by major developed countries, but also to quite a few country-specific challenges, including structural imbalances, infrastructural bottlenecks, increased financial risks, incoherent macroeconomic management, as well as political tensions, said the report.

            Growth in the developed economies is projected to be 2.0% and 2.4% for 2014 and 2015 respectively, about one percentage point higher than in the previous two years. For the first time since 2011, all major developed economies in North America, Europe and developed Asia are aligned together on the same upward growth trajectory, forming, hopefully, a virtuous cycle to reinforce their recovery, said the UN.

            "Nevertheless, after five years of being mired in the aftermath of the financial crisis, these projected growth rates are insufficient to recuperate the output and job losses in most of these economies. They are still confronting a number of challenges, including the remaining fragilities in the euro area, the elevated unemployment rates in some of these economies and unsustainable public finances in the longer run," it added.

            Turning to international trade flows, the UN reported that world trade growth has been flat in the first quarter of 2014, but that some gradual improvement is expected over the course of the year as import demand in major developed countries continues to gradually increase.

            Real exports are forecast to grow by 4.1% in 2014, almost twice as fast as in 2013, but still below the pre-crisis trend of double the global output growth. Further improvement is expected to continue into 2015, with export growth rising to 5.1 per cent.

            With respect to capital flows, the report said that as the United States Federal Reserve (the Fed) gradually scales back its monthly asset purchases, developing countries and economies in transition have seen a marked reduction in capital inflows in 2013 and early 2014, remaining exposed to sudden changes in financial market sentiment. However, the episode in early 2014 differed from the one in mid-2013 in several respects.

            First, said the UN, the abrupt change in market sentiment was not triggered exclusively by a shift in views about the Fed's policy path, but by a combination of factors, including fears of a larger-than-expected slowdown in emerging economies. Second, the recent sell-off of emerging market assets was mainly limited to equities, reflecting a flight to safety, with long-term United States interest rates retreating. Third, the latest market correction was smaller and shorter in duration, with investors discriminating more among emerging economies.

            In its outlook, the UN said that capital flows to emerging economies are projected to pick up slowly from the low levels seen in recent quarters, in line with the expected recovery in global growth. However, significant uncertainties and downside risks stem from the interaction between perceptions of the Fed's tightening path and the idiosyncratic weaknesses in some emerging markets.

            Highlighting economic trends by region, the report said that in the United States, the growth momentum built in the second half of 2013 weakened notably in the first quarter of 2014, mainly because of inclement weather, but growth is expected to pick up going forward, with GDP expected to grow by 2.5% and 3.2% in 2014 and 2015, respectively.

            "Both private consumption and business investment are expected to increase at a stronger pace than in the past two years, along with a continued improvement in the labour market and the housing sector. Monetary policy is expected to remain highly accommodative during 2014 and into 2015, while fiscal policy will be less restrictive than in the previous year. The external conditions for the United States economy are expected to improve, but only slightly, as foreign demand from major trade partners is expected to remain relatively weak," said the report.

            The Japanese economy expanded by 1.5% in 2013 and is projected to expand by 1.4% and 0.9% in 2014 and 2015, respectively. The fiscal stimulus package introduced in 2013 supported growth, but this stimulus is set to fade out. In April 2014, with an increase in the sales tax, the Government has also provided for more expenditure through a supplementary budget, but the magnitude is not enough to fully offset the negative impact of higher taxes, said the report.

            Western Europe emerged from recession in the second quarter of 2013, whereby in the EU-15, GDP is expected to grow by 1.5% in 2014 and 1.8% in 2015.

            The report said that since the announcement of the European Central Bank's Outright Monetary Transactions facility in September 2012, financial tensions in the region have subsided significantly and confidence has rebounded. Fiscal austerity programmes have lessened in intensity and balance sheet repair, while ongoing, is also less of a drag on activity.

            "The recovery remains weak, with GDP still below its pre-crisis level," said the UN, adding that the weakness of the recovery is also a major factor behind the dire unemployment situation, in that in the EU-15, unemployment was 11.1% in 2013 and is only expected to stabilise in 2014, before coming down to 10.6% in 2015.

            With regards to the new EU member states, the UN reported that the recovery in these economies is firming against the backdrop of stronger activity in the EU-15, a modest pick-up in domestic demand, less fiscal drag and a turnaround in the inventory cycle.

            All countries in the region are expected to register positive growth in 2014, with the exception of Croatia.

            According to the report, the CIS (Commonwealth of Independent States) region continues to face a challenging international environment and, in addition, many countries are confronted with domestic challenges and risks.

            Among developing economies, Africa will continue to see solid growth of 4.2% this year, although political problems in a number of countries have led to a downward revision compared to the previous forecast, said the UN, citing the example of Libya where disruptions to oil output and exports will be a major drag on growth, underpinning a significantly lower growth rate for North Africa than previously forecast.

            In 2015, overall growth (in this region) will accelerate to 5.1%, carried by some rebound in North Africa in view of a recovery of oil exports in Libya and stronger growth in South Africa underpinned by solid export demand and increasing consumption and investment.

            "East Asia is expected to see robust growth as exports to developed countries strengthen and domestic demand in most economies remains firm. Economic activity in the region is projected to expand by 6.0% in both 2014 and 2015, the same pace as in 2013 and a marginal downward revision from the previous forecast."

            China's growth rate is expected to moderate further over the next few years, with GDP projected to expand by 7.3% in 2014 and 7.1% in 2015, down from 7.7% in 2013, said the report, emphasising that this lower growth trajectory is in line with the Government's focus on raising the quality of development and economic restructuring.

            The UN further said that Thailand is the only country in the region for which the short-term outlook has deteriorated sharply since the release of its earlier report in January - with the continuing political unrest taking an increasing toll on domestic demand, Thailand's GDP growth is projected to drop to about 2% in 2014.

            "The slowdown in China and Thailand will likely be offset by a pick-up in growth in the region's most export-oriented economies, which benefit significantly from stronger demand in the United States and the European Union."

            The report said that governments in this region are expected to maintain their current prudent fiscal policy stances, and that against the backdrop of improved global conditions, higher interest rates in the United States and a slight acceleration in domestic inflation, central banks may start tightening monetary policy in the latter part of the forecast period.

            With regards to South Asia, the UN said that average economic growth here is projected to pick up gradually in the forecast period, after remaining near a two-decade low in 2013, with GDP estimated to expand by 4.6% in 2014 and 5.1% in 2015, up from 3.9% in 2013.

            "The moderate recovery is expected to be underpinned by stronger consumption and investment in the context of enhanced macroeconomic stability. Several of the region's economies, including India, have seen lower inflation, stronger external balances and more stable currencies in recent quarters, conditions that are expected to support business and consumer confidence."

            The strength of the recovery in South Asia will, however, be restricted by structural impediments, including energy and transport constraints, political unrest and violence, and a lack of economic policy reforms, it said.

            India's economy is forecast to grow by 5% in 2014 and 5.5% in 2015, only slightly up from 4.8% in 2013, while the Islamic Republic of Iran is projected to see a return to mildly positive growth in 2014 as the partial lifting of sanctions will help non-oil exports. Economic growth is also expected to pick up slightly in Bangladesh and Pakistan, supported by increases in remittance inflows and a slowly improving investment climate, while Sri Lanka remains the region's fastest growing economy, with annual growth forecast to stay above 7% in the outlook period.

            Economic growth in Latin America and the Caribbean is expected to continue at a subdued pace in 2014, amidst increasing difficulties in some of the largest economies, with the region expected to grow moderately by 2.6% in 2014, although with significant heterogeneity across sub-regions.

            Economic growth in Mexico and Central America is strengthening, benefiting from the pick-up in activity in the United States, with Mexico expected to grow by 3.2% in 2014, accelerating from growth of 1.1% last year. By contrast, growth in South America is decelerating markedly from 3.2% in 2013 to 2.1% in 2014.

            Argentina is experiencing a noticeable slowdown, amidst decreasing business confidence and persistent inflation pressures, while Venezuela is likely to enter into recession, said the report. Brazil's economy continues to expand at a very moderate rate of 1.7% in 2014, with meagre prospects for investment demand and increasing pressure for fiscal consolidation. Other South American countries such as Bolivia, Colombia and Peru continue on a more solid growth path.

            Meanwhile, growth in the Caribbean is expected to accelerate to 3.6 per cent in 2014, and that despite the continuing subdued growth, the unemployment rate is expected to remain relatively low.

            According to the report, the least developed countries (LDCs) will see solid and accelerating growth in 2014/15, benefiting from favourable external demand conditions. In 2014, LDCs are expected to expand by 5.6%, a further increase from the rate of 4.8% and 5.3% achieved in 2012 and 2013, respectively.

            An important risk factor for global growth and financial stability remains the future adjustment in monetary policies by major developed countries, particularly QE (quantitative easing), said the report.

            In the outlook, the UN said that as the QE of the United States is expected to be phased out in late 2014 and policy interest rates are expected to increase in mid-2015, this could lead to overshooting in long-term interest rates worldwide, selling off in global equity markets, outflows of capital from emerging economies, an increase in external financing costs for developing countries, and further depreciation of currencies for emerging economies.

              

            "As a result, developing countries and economies in transition could face more painful adjustments and the moderate global growth could be derailed." – Third World Network Features.

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About the author: Kanaga Raja is the Editor of the South-North Development Monitor (SUNS).

The above article is reproduced from SUNS #7814, 2 June 2014.

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