Global economy improving but risks remain

The recovery in the world economy in the aftermath of the crisis of 2008-09 has been sluggish and uneven.

The OECD estimates the world economy grew by 2.7% in 2013, down from 3.1% in 2012 and 3.7% in 2011. Growth in the OECD region is put at just 1.2% last year, down from 1.6% in 2012 and 1.9% in 2011.

However, this low average rate actually masks a pick-up in growth in advanced economies in 2013. By contrast, there was a slowdown in activity in many emerging economies last year.

Both the IMF and OECD expect there will be a further gradual strengthening of activity in advanced economies over the next two years. This will be driven by a stronger US economy, a reduced drag from fiscal tightening, low inflation which boosts spending power, and the on-going highly accommodative stance of monetary policy.

However, considerable downside risks remain. The slowdown in emerging market economies, on-going private sector deleveraging combined with fiscal tightening, continuing financial fragilities and imbalances, as well as a tightening of financial conditions, are all risks to the global economy.

In the US, GDP growth is expected to pick up from below 2% last year to around 3% in 2014-15. Fiscal policy will have a far less dampening effect on activity compared to 2013. Deleveraging is also quite well advanced in the US.

Rising employment and the marked fall in inflation should boost US consumer spending, with a further rise expected in housing construction to meet pent-up demand. Crucially, though, both business investment and exports need to pick up in the US after subdued performances in 2012-13, if GDP growth is to accelerate to around 3%. This would put the US recovery on a secure footing.

There was a marked pick-up in activity in the UK during 2013, after the economy stagnated in 2012. The continued strength of leading indicators, improving labour market trends and easing inflationary pressures, all suggest that the recovery will prove sustained.

Again, though, as in the US, both business investment and exports need to pick up to put the recovery on a more secure footing. The OECD is forecasting Britain’s GDP could expand by around 2.5% in both 2014 and 2015, even though the economy still faces some headwinds, most notably from fiscal tightening and weak income growth.

In the eurozone, activity has been depressed by a combination of deleveraging by the private sector, tight credit conditions and a sharp tightening of fiscal policy.

The economy emerged from an 18-month long recession in the second quarter of 2013. However, the recovery since then has been very weak and uneven, with GDP expanding by just 0.1% in quarter three, after a modest rise of 0.3% in the previous quarter.

Thus, after contracting by 0.6% in 2012 and 0.4% in 2013, eurozone GDP is expected to grow by just 1% in 2014 and 1.5% in 2015. Therefore, the recovery is expected to continue to lag well behind elsewhere.

Furthermore, eurozone unemployment is expected to remain very high at around 12% in contrast to the US and UK, where been falling to 6.7% and 7.4% respectively.

In Asia, the Japanese economy has grown strongly in the past two years, helped by very expansionary fiscal and monetary policies. Fiscal consolidation is likely to see a slowdown in growth in 2014-15, even though exports should be supported by yen’s sharp fall.

Meantime, GDP growth in China looks to be stabilising at around 8%, while growth in India is expected to pick up in 2014-15.

Overall, then, while the global economy is improving, downside risks remain so the recovery is not yet secured.

Oliver Mangan, chief economist AIB

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