Pace of global recovery continues to disappoint

The recovery of the global economy from the Great Recession of 2008-09 has been very sluggish and uneven and this remains the case in 2014. Growth in advanced economies was weak at less than 1.5% in 2012 and 2013 and will not be that much stronger in 2014. 

Meantime, there has been a marked slowdown in activity in many emerging economies since 2011, including the four BRIC economies, which has extended into this year. GDP figures were disappointing in a number of economies in the first half of 2014, with the UK being a notable exception. Growth was below expectations in the US and eurozone in the opening quarter and remained moderate in many emerging economies.

The US economy rebounded strongly in the second quarter but the eurozone economy stagnated. Meantime, the Japanese economy contracted in the second quarter after a sharp hike in sales taxes. Overall, global growth was below expectations and quite uneven.

There are indications, though, that the recovery in global activity may gain some momentum in the second half of the year. The OECD leading indicator index in recent months has been at its best level in three years. Meanwhile, consumer confidence in the OECD has risen to its highest level since late 2007.

Recent PMI data have been strong with the Global Composite index for June and July climbing to its highest level since early 2011. Labour market conditions are also improving, with unemployment declining in all the major advanced economies year to-date. This should help support consumer confidence and household spending.

Key drivers are still supporting the recovery, in particular the highly accommodative stance of monetary policy and reduced drag from fiscal consolidation. Financial conditions have also eased virtually everywhere this year, with a further marked fall in long-term interest rates.

This has been aided by on-going quantitative easing by some central banks and a further loosening of monetary policy by the ECB. Inflation has also fallen to very low levels in many economies. This should provide a boost to real consumer spending power.

Hence, organisations like the OECD and IMF remain optimistic that the recovery in the world economy can gain momentum. The OECD is looking for developed economies to grow by 2.8% next year.

The IMF, in its latest quarterly update, is forecasting that growth in advanced economies will pick up to around 2.5% next year, helped by a stronger performance from the US in particular. Growth in the world economy is forecast at 4%, up from 3.4% this year and 3.2% in 2013.

Downside risks, though, persist and remain a real concern. Increased geopolitical tensions could yet lead to sharply higher energy prices and also damage international trade.

There is a risk of a marked rise in long-term interest rates as some major central banks start to tighten monetary policy. This could cause severe dislocation in financial markets, with widening credit spreads and increased volatility.

There are concerns that the weak performance of the eurozone economy may persist given the absence of structural reforms. Meanwhile, China appears to have moved to a slower growth path.

There are also concerns that the Great Recession of 2008-09 may have done long-term damage to growth prospects. It has resulted in a marked tightening of credit conditions and a weakened banking system. It also left very high debt.

The global recovery, then, remains fragile and could well continue to disappoint expectations.