An Uneven Global Recovery Continues
•The global growth projection for 2014 has been marked down by 0.3 percent to 3.4 percent, reflecting both the legacy of the weak first quarter, particularly in the United States, and a less optimistic outlook for several emerging markets. With somewhat stronger growth expected in some advanced economies next year, the global growth projection for 2015 remains at 4 percent.1/
•Global growth is expected to rebound from the second quarter of 2014, as some of the drivers underlying first quarter weakness, such as the inventory correction in the United States, should have only temporary effects, and others should be offset by policies, including in China. But the first-quarter setback will only be partially offset.
•Downside risks remain a concern. Increased geopolitical risks could lead to sharply higher oil prices. Financial market risks include higher-than-expected U.S. long-term rates and a reversal of recent risk spread and volatility compression. Global growth could be weaker for longer, given the lack of robust momentum in advanced economies despite very low interest rates and the easing of other brakes to the recovery. In some major emerging market economies, the negative growth effects of supply-side constraints and the tightening of financial conditions over the past year could be more protracted.
•In many advanced and emerging market economies, structural reforms are urgently needed to close infrastructure gaps, strengthen productivity, and lift potential growth.
Global growth moderated more than expected in the first quarter of 2014, from an annual rate of 3¾ percent in the second half of 2013 to 2¾ percent—some ½ percentage point lower than the forecast in the April 2014 World Economic Outlook (WEO). Although there were upside surprises to activity—in Japan, and also in Germany, Spain, and the United Kingdom—four negative surprises dominated.
In the United States, the inventory overhang at the end of 2013 turned out to be larger than expected, leading to a stronger correction. A harsh winter further dampened demand, exports declined sharply after a strong fourth quarter, and output contracted in the first quarter of 2014. In China, domestic demand moderated more than expected, reflecting the authorities’ effort to rein in credit growth and a correction to real estate activity. Activity in Russia decelerated sharply as geopolitical tensions further weakened demand. In other emerging market economies, weaker-than-projected growth resulted both from weaker external demand, notably from the United States and China, and, in a number of cases, softer domestic demand with weaker investment growth.
Financial conditions have eased since the April 2014 WEO was released. Long-term interest rates in advanced economies have declined further, in part reflecting expectations of a lower neutral policy rate over the medium term; indicators of expected price volatility have declined as well, and equity prices have strengthened. With euro area inflation in April below expectations, the European Central Bank cut its policy rate and deployed other easing measures at its June meeting. In this environment, capital flows to emerging market economies have recovered despite generally weaker activity, bond spreads for emerging market sovereigns have declined, and exchange rates and equity prices have stabilized or even strengthened in some of these economies.
Leading indicators point to the global recovery regaining strength in the second quarter of 2014. This is consistent with the view that the unexpected weakness in the first quarter was in large part temporary, because the impact of factors such as harsh winter weather and inventory correction will disappear and policies have already responded to weaker growth, including in China. Moreover, key drivers supporting the recovery identified in the April 2014 WEO remain in place, including moderating fiscal consolidation and highly accommodative monetary policy in most advanced economies. Nevertheless, some of the demand weakness in the first quarter appears to be more persistent, especially in investment globally, and is expected to result in lower global growth in 2014 compared with that predicted in the April 2014 WEO. Overall, global growth, which is now computed using the new 2011 purchasing power parities of the International Comparison Program (see box), is projected to rise to 3.4 percent in 2014 and 4 percent in 2015 (Table 1).
Turning to the major advanced economies, a growth rebound is underway in the United States as temporary factors wane. But with a more muted recovery in investment, the rebound is expected to provide only a partial offset to the weak first-quarter outcome in terms of annual growth. Growth is now projected at 1.7 percent for 2014, rising to 3 percent in 2015. Growth in the euro area is expected to strengthen to 1.1 percent in 2014 and 1½ percent in 2015 but to remain uneven across the region, reflecting continued financial fragmentation, impaired private and public sector balance sheets, and high unemployment in some economies. In Japan, with a stronger than expected performance in the first quarter, growth in 2014 is now projected to be higher at 1.6 percent, decelerating to 1.1 percent in 2015, mostly due to the planned unwinding of fiscal stimulus.
Source: IMF
