BDI GLOBAL ECONOMIC REPORT

The global economy is continuing to recover, but still has not returned to the four percent average growth rates seen in recent years. Though the developed economies have gradually begun to show signs of stabilising, the economic performance of the newly industrialised countries, with the exception of China, has been somewhat more modest of late. Growth in several emerging economies has been hampered by reduced domestic demand. Supply-side obstacles to growth, such as infrastructure bottlenecks, also had to be overcome. Meanwhile, commodity-exporting countries had to cope with declining demand. However, recently released early indicators point to a global upswing in economic activity. In November 2013, Markit’s global Manufacturing Purchasing Managers’ Index hit its highest level since May 2011. The OECD Composite Leading Indicators suggest that most developed economies will experience rising growth rates. The economic outlook is more optimistic in both the developed and newly industrialised countries, according to the Ifo World Economic Climate Index. Overall, the IMF expects world trade and global economic output to grow by 4.5 percent and 3.7 percent respectively in 2014. In Asia’s newly industrialised countries, economic activity gained momentum again in the second half of 2013. The government in China was able to stabilise growth with a series of smaller stimulus packages. The Chinese economy grew quite substantially in the third quarter, up 7.8 percent over the previous year. The inflation rate was only three percent according to the latest data, and thus below the government’s limit, which allowed the country’s central bank to maintain the key interest rate. The IMF’s growth forecasts for 2013 and 2014 stand at 7.7 percent and 7.5 percent respectively. India’s growth potential is severely constrained by poor infrastructure, overregulation and protectionist measures. Following two consecutive quarters of negative growth, the country fell into a recession in the first half of 2013. The IMF expects that the country’s economy will expand by 4.4 percent in 2013, before strengthening somewhat to 5.4 percent in 2014. Economic output in Brazil contracted by 0.5 percent in the third quarter of 2013 compared with the previous quarter. South America’s largest country continued to be hobbled by high inflation and a weak currency, so much so that its central bank was compelled to raise key interest rates to ten percent. The commodity-rich country was also hit with falling export demand. The IMF has lowered its growth forecast to 2.3 percent in 2014. Russia’s economy also entered a weak phase in the first half of 2013 due to sluggish foreign demand and weak capital investment. After having an average annual growth rate of 1.5 percent in 2013, growth will continue to be weak in 2014, with growth in GDP forecast at just two percent by the IMF. The United States recently surprised analysts with a significant rise in GDP. By posting an increase of 0.9 percent over the second quarter, the US economy grew faster in the third quarter of 2013 than in any other quarter in almost two years. This equates to a 1.8 percent uptick in GDP on a year-on-year basis. The upswing in economic activity was primarily driven by a marked increase in private investment and higher-than-average inventories. Numerous economic indicators continue to point upward. Manufacturing showed another improvement in the latest data, growing 3.1 percent over the same month last year. Although the ISM Purchasing Managers’ Index fell in December for the first time since May 2013, with the month-to-month reading dropping to 57 points, it remained at a level that corresponds to overall economic growth of more than four percent. The good economic performance will ultimately bring about an end to the Federal Reserve’s expansive monetary policy. According to the US Department of Labor, the unemployment rate fell from seven to 6.7 percent from November to December 2013, thus nearing the target threshold of 6.5 percent. The Fed has signalled that it would start unwinding its bond-buying programme once this threshold is crossed. Falling unemployment, however, should not blind us to the fact that the labour force participation rate dropped to a historic low of 62.8 percent in December. Overall, though, reports on the US economy remain predominantly positive, suggesting that the stable upward trend will continue. The IMF’s most recent forecasts for US GDP growth stand at 1.9 percent for 2013 and 2.8 percent for 2014. Growth momentum in Japan slowed somewhat in the third quarter. After posting a 0.9 percent rise in GDP during the second quarter, Japan saw its GDP grow by just 0.3 percent, quarter on quarter, in the most recent data. The uptick was mainly due to an expansion of government spending, which was especially directed towards investments in public infrastructure. Meanwhile, private consumption and private-sector investment played almost no role in growth. Japan’s current account surplus narrowed in the third quarter to just 0.5 percent of GDP, mainly due to a rise in energy imports. Measures introduced by the Japanese government to fight deflation and low growth have had only limited success. Although the inflation rate stood at 1.1 percent in October 2013, its highest level in five years, business and consumer demand is still too weak for a self-sustaining upturn. The latest unemployment rate stood at four percent, slightly below last year’s level, but consumer confidence was somewhat weaker than at the start of the year. Manufacturing rose sharply in recent months. The Japanese government passed another stimulus programme, amounting to around one percent of the country’s total annual economic output, to offset potential contractionary pressures that may be triggered by April’s consumption tax increase from five to eight percent. It is therefore possible that private consumption will gather momentum at the beginning of 2014 as a result of the pull-forward effect. According to the IMF’s latest projections, the Japanese economy will grow at a rate of 1.7 percent in both 2013 and 2014. Economic output in the European Union (EU 28) expanded for the second consecutive quarter. Third-quarter GDP rose by 0.2 percent over the previous period, following GDP growth of 0.4 percent in the second quarter. Economic output also showed a slight improvement of 0.1 percent over the same quarter last year. The European Commission’s autumn economic forecast predicts that overall EU GDP will stagnate in 2013. The 1.4 percent increase in total GDP growth this year will finally take the EU out of recession. The eurozone is also seeing an improvement in economic activity. Having posted GDP growth of 0.3 percent in the second quarter, the eurozone saw another slight increase of 0.1 percent in the third quarter compared with the previous period. Without the sluggish performance of economic heavyweights Italy and France, GDP growth would have been 0.2 percent. Economic output grew during the third quarter in all eurozone countries, with the exception of the Czech Republic, Cyprus, France and Italy. This signals that the worst may be over for the eurozone. Other economic indicators also point towards an economic upturn. Manufacturing sentiment indicators have been on the rise continuously since May 2013; consumer confidence has improved compared with levels observed in the spring; and eurozone manufacturing has seen two consecutive periods of year-on-year increases, according to the most recent data. The European Commission also expects an economic recovery in the eurozone. Although real GDP in 2013 will decrease by 0.4 percent over the previous year, a growth rate of 1.1 percent (IMF: 1.0 percent) is expected in 2014. After some time, this modest recovery will filter through to the labour market. The unemployment rate has been stuck at 12.1 percent since April 2013 and will remain at this level in 2014. The Commission predicts that it will be 2015 before unemployment declines slightly.

 SOURCE: BDI  THE VOICE OF GERMAN INDUSTRY