Upward revisions to developed-economy growth forecasts have offset, to a large extent, some sizeable downward revisions across a broad range of emerging market countries (EM), although not China, leaving global forecasts for this year and next essentially unchanged.
Global Economic Growth
The table below shows the latest consensus estimates from a number of leading investment houses for this year and next:
With most GDP reports around the world now published (although still subject to future revisions), global growth in the second quarter accelerated to a 3.3%, annualised rate following 2.2% in the first quarter. A continuation of this pick up into the third quarter is unlikely, however, given the relatively weak start to the quarter’s data in the US and the highly uncertain outlook for a number of the main EM countries, such as Brazil, India and Indonesia, which in aggregate account for 11.5% of global GDP on a PPP basis (the same as Germany, France, Italy and Spain combined).
In recent years, commentators have relied increasingly on PMI surveys to gauge the momentum of global growth and, in the last few months, these have surged ahead, especially in the developed world and particularly the forward-looking new orders figures for both manufacturing and services. The scale of the improvements in business sentiment may well overstate the case, however, given fundamentals that in developed countries remain fragile and in EM are very mixed with sizeable structural issues still to be addressed in a number of important economies.
Even so, forecasters expect a stronger final quarter of 2013 and a much better year in 2014 with world output returning to at least trend growth. For the first time for some considerable period the expansion will not be EM-led as the developed economies are forecast to contribute some 70% of the increase in growth from 2.9% to 3.7%.
The US Economy
A large part of this growth acceleration is forecast to come from the US, although there is little in the way of hard data to support this view as yet. Q3 “tracking forecasts” are in a 1.5%-2.0% range, following an export-driven, upward revision to Q2 GDP growth to 2.5% from 1.7%. Tighter financial conditions appear to have stalled the housing rebound for now and higher energy prices have added another headwind to consumer spending. Nevertheless, PMI surveys, auto data and an easing of fiscal impediments point to stronger growth in Q4. In order to achieve the Fed’s goal of a sustainable expansion, however, still requires a return to a private sector-led virtuous circle of job growth, generating higher incomes, stronger consumer spending and further corporate hiring and capital expenditure. This is a prerequisite for 2014 GDP rising to 2.7% from the 1.6% expected this year.
The Eurozone
Hopes are high that the euro areawill also be a significant contributor to growth next year with forecasts now up to 1.3%, a sizeable turnaround from this year’s predicted contraction of 0.5%. Q2 GDP was better than anticipated, growing at an annual rate of 1.2%, supported by a strong recovery in Germany and France but also improving conditions in all the peripheral countries. This is still a modest recovery, however, with the consensus projecting H2 growth of around 1.0% but evidence of recovery in both domestic and external demand suggests scope for upward revisions.
The UK Economy
In the UK, Q2 growth was revised up to a near 3% annual pace and, with PMI and other survey data pointing to a mini-boom, a number of commentators have pushed forecasts to a similar level for H2. The latest manufacturing PMI survey registered strong growth in activity and new orders, the latter the fastest for nineteen years, and both services and construction were similarly strong. As with the US, these figures may flatter to deceive somewhat as both the source of demand is still unclear, real income growth is flat and credit flows remain weak. Full year forecasts are now up to 1.2%, rising to a little over 2% for next year—better but still not good.
Japan and Emerging Markets
Japanis the one major country in the developed world expected to contribute less to global growth next year compared to this year. This is entirely due to an anticipated rise in the consumption tax next April from 5% to 8%. A final decision will be announced by Prime Minister Abe early next month but it is likely to be accompanied by corporate tax cuts or tax breaks as part of the “Abenomics” reform programme. Q2 GDP disappointed with growth at only a 2.6% annual rate as capital expenditure was far weaker than expected. This mid-year halt in momentum appears to have been arrested, however, and a number of forecasters recently raised H2 estimates substantially.
Early summer signs of a rebound in the Chineseeconomy were confirmed during August as government macro data improved and the PMIs were notably higher. This reflected policy boosts during Q2, including targeted investment and a prior surge in credit growth. Following a long period of persistent downward revisions, rising optimism has led to some modest forecast increases.
Just as fears of a more dangerous Chinese slowdown have ebbed away, those in a number of Asianand emerging marketcountries have escalated. While North Asian countries appear on the brink of a cyclical upturn, current account deficit-led financial market fears in India, Indonesia and Turkey, for example, have intensified in recent weeks resulting in rapidly rising bond yields and further bouts of currency panic. With weaker growth already in train, actions by central banks are accentuating the slowdown as they attempt to regain investor confidence and stem capital outflows. While most commentators remain convinced that this is not a rerun of the 1997 Asian Financial Crisis, there is still considerable uncertainty as to whether domestic policy actions will be sufficient to avoid a more debilitating outcome.
