Risks Persist Despite Strong Recovery in Advanced Economies and Robust Growth in Emerging Markets

CEIC WorldTrend Data Talk, May 9, 2014 - In April 2014 the International Monetary Fund (IMF) published the World Economic Outlook (WEO) report, a review and forecast of the global economic environment. The global economy has shown substantial improvement, fostered by recovery in advanced economies. Growth in emerging markets also remains robust, despite the concerns about capital outflows and restricted credits due to the United States Federal Reserve Board's tapering of its bond purchases. Despite the positive outlook, downside risks still persist in both advanced economies and emerging markets. The IMF has revised its 2014 projection for world growth to 3.59%, which is slightly lower than the previously reported figure of 3.66% released in January this year. The adjusted growth forecast is attributable to the pared growth expectation for Emerging Markets and Developing Economies (EMDE), where growth forecasts for 2014 and 2015 decreased by 0.16 and 0.13 percentage points respectively. The reduction in EMDE growth could be explained by the geopolitical risks that have emerged recently plus the aggravated risks that emerging markets are facing. Despite these negative effects, the long-run growth of the EMDE region remains robust, and average output is expected to grow at a rate above 5.32% per year from 2015 to 2019. In advanced economies, significant recovery is expected in 2014 with a projected economic growth rate of 2.22%, almost one percentage point higher compared to the 1.29% growth in 2013. Europe is the major driver of the strong recovery in advanced economies. Out of seventeen Euro Area countries In 2014 (excluding Latvia which joined the Euro Area on 1 January 2014), Cyprus is the only one expected to have negative growth this year, while in 2012 and 2013 the number of countries that experienced economic declines were ten and nine respectively. Although the upgraded projection for output is encouraging, the low inflation within the Euro Area could be a ticking bomb in Europe. Inflation in the Euro Area has been decreasing since 2011 from 2.7% to 0.92% according to the forecast for 2014, which substantially deviates from the 2% inflation objective of the European Central Bank over the medium term. There are concerns that low inflation may develop into deflation, especially for countries with high unemployment such as Greece, Spain and Cyprus. There are signals emitted by the ECB that a quantitative easing programme is a possible means for the Eurozone to fight off the deflation threats it is currently facing. However, whether the programme would be actually implemented is still questionable. In developing Asia, growth remains robust despite the widely feared spill-over effect of the US tapering. The ASEAN-5 region, consisting of Indonesia, Malaysia, the Philippines, Thailand and Vietnam, is expected to grow at a rate between 4.95% and 5.62% per year from 2014 to 2019. The expected growth of Thailand in 2014, the lowest among the ASEAN-5 countries, drops to 2.50% compared to 2.87% in 2013, due to the political unrest there. Growth in the Philippines and Indonesia is also projected to slow down, from 7.16% to 6.47% and from 5.78% to 5.36% respectively. In spite of the somewhat pessimistic forecasts in these three countries, overall ASEAN-5 is predicted to grow at a faster pace of 5.60% in 2014, compared to 5.42% in the previous year. Other than the risks mentioned in the advanced economies and the emerging markets, several geopolitical risks add uncertainty to the global economic environment. The conflict between Ukraine and Russia could escalate with the recent intervention by the United States, and the exchange of artillery fire between North and South Korea in March heightened tensions on the Korean peninsula. Undoubtedly, there are signs that the global economy has strengthened and the trend is expected to persist, but market investors still need to keep a close eye on these potential threats. By Eric Ng Google+ Author Profile - CEIC Analyst Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
9th May 2014 Risks Persist Despite Strong Recovery in Advanced Economies and Robust Growth in Emerging Markets

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