Revival in advanced economies gives impetus to global growth

By Dr R Seetharaman The IMF World Bank Spring meeting was held last week in Washington D C. The event had sessions on various topics impacting global economy such as World Economic Outlook, Global Financial Stability and Fiscal Monitor. According to the IMF world economic outlook, April 2014, global activity strengthened during the second half of 2013, and is expected to improve further in 2014–15.

Global growth is projected to strengthen from 3% in 2013 to 3.6% in 2014 and 3.9% in 2015 respectively. In advanced economies, growth is expected to increase to about 2.25% in 2014–15, an improvement of about 1% compared with 2013.

The major impetus to global growth has come from the US, whose economy grew at 3.25% in the second half of 2013. The recovery in the US has contributed to global growth. Recent indicators in the US economy suggest some slowing in early 2014, mainly on account of unusually bad weather. However, growth in the US is expected to be 2.8% in 2014.

Growth is expected to be stronger in the core euro area. It is weaker in euro countries, with high debt and financial fragmentation, which will both weigh on domestic demand. Overall, economic growth in the euro area is projected to reach only 1.2% in 2014 and 1.5% in 2015.

Japan’s overall GDP is projected to slow moderately in response to a tightening of fiscal policy stance in 2014–15. Overall, growth is projected to be 1.4% in 2014 and 1% in 2015. Key drivers in advanced economies are a reduction in fiscal tightening, except in Japan, and still highly accommodative monetary conditions. The economic revival in advanced economies gives impetus to global growth.

In emerging market and developing economies, growth picked up slightly in the second half of 2013. On one hand, export growth increased, lifted by stronger activity in advanced economies and by currency depreciation.

On the other hand, investment weakness continued, and external funding and domestic financial conditions increasingly tightened. In emerging market and developing economies, growth is projected to pick up gradually from 4.7% in 2013 to about 4.9% in 2014 and 5.3% in 2015.

Some of the emerging economies faced challenging conditions in 1st quarter of 2014 such as concerns of Shadow banking in China, Ukraine tensions, fall in Russian Rouble and high interest rates in India. Growth will be helped by stronger external demand from advanced economies, but tighter financial conditions will dampen domestic demand growth.

The major challenges to global economic recovery include high debt levels in many countries, high unemployment, completion of financial sector reforms, risk of low inflation, heightened market volatility and Geopolitical tensions.

The areas of emphasis to speed up growth include higher, well-prioritised investment to increase potential output and to create jobs and inclusive labour market reforms that can go a long way in boosting potential growth.

Growth was tepid across the Middle East and North Africa, Afghanistan, and Pakistan (MENAP) in 2013, as declines in oil production and weak private investment growth amid continued political transitions and conflict offset increases in public spending.

MENAP growth is expected to be 3.2% in 2014 and 4.4% in 2015 respectively. Most of the recovery is due to the oil-exporting economies, where high public spending contributes to buoyant non-oil activity in some economies and oil supply difficulties are expected to be partly alleviated in others. GCC GDP at current prices is expected to grow by 3.5% in 2014 and touch $1.7tn and GCC current account balance as a percentage of GDP at current prices will reach 18% in 2014.

In its Global Financial Stability Report, the IMF has highlighted that over the last six months financial stability has broadly improved in advanced economies and has deteriorated in emerging economies.

The concerns of unwinding of stimulus by the US Fed had had an impact on emerging economies. Policymakers should finish repair of banks and corporates in euro area.

In its Fiscal Monitor Report, the IMF has stated that across advanced economies, the pace of fiscal consolidation is set to slow in 2014 as the focus shifts to how to best design fiscal policies supportive of both further consolidation and a still uneven recovery.

Advanced economies should realign their fiscal policies to support economic recovery. In emerging market economies, deficits remain significantly above pre-crisis levels, as most countries opted to postpone fiscal adjustment in 2014.

* Dr R Seetharaman is Group CEO of Doha Bank. The views expressed are his own.