Global economy looks overcast

Global growth is projected to remain subdued at slightly above three per cent in 2013, the same as in 2012, according to the IMF.

This is less than forecast in the April 2013 World Economic Outlook (WEO), driven to a large extent by appreciably weaker domestic demand and slower growth in several key emerging market economies, as well as a more protracted recession in the euro area.

“Downside risks to global growth prospects still dominate: while old risks remain, new risks have emerged, including the possibility of a longer growth slowdown in emerging market economies, especially given risks of lower potential growth, slowing credit, and possibly tighter financial conditions if the anticipated unwinding of monetary policy stimulus in the United States leads to sustained capital flow reversals,” says a recent report.

“Stronger global growth will require additional policy action. Specifically, major advanced economies should maintain a supportive macro-economic policy mix, combined with credible plans for reaching medium-term debt sustainability and reforms to restore balance sheets and credit channels. Many emerging market and developing economies face a trade-off between macro-economic policies to support weak activity and those to contain capital outflows. Macro-prudential and structural reforms can help make this trade-off less stark.

“Financial market volatility increased globally in May and June after a period of calm since last summer. In advanced economies, longer-term interest rate and financial market volatility have risen. Peripheral euro area sovereign spreads have widened again after a period of sustained declines. Emerging market economies have generally been hit hardest, as recent increases in advanced economy interest rates and asset price volatility, combined with weaker domestic activity have led to some capital outflows, equity price declines, rising local yields, and currency depreciation.

“Global growth increased only slightly from an annualised rate of 2½ per cent in the second half of 2012 to 2¾ per cent in the first quarter of 2013. The underperformance was due to three factors. First, continuing growth disappointments in major emerging market economies, reflecting, to varying degrees, infrastructure bottlenecks and other capacity constraints, slower external demand growth, lower commodity prices, financial stability concerns, and, in some cases, weaker policy support.

“Secondly, a deeper recession in the euro area, as low demand, depressed confidence, and weak balance sheets interacted to exacerbate the effects on growth and the impact of tight fiscal and financial conditions.

Thirdly, the US economy expanded at a weaker pace, as stronger fiscal contraction weighed on improving private demand. By contrast, growth was stronger than expected in Japan, driven by consumption and net exports—the latter helped by the 20 per cent depreciation of the yen (in real effective terms) since late 2012.”