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Outlook for global economy 'remains uneven'.


The global economy continues to stumble along. According to the latest IMF World Economic Outlook (WEO) published, global economic growth slowed to an annual rate of 2.7 percent in the first quarter of 2014, well below the 3.6 percent registered in the previous quarter.

Part of the slowdown was due to a temporary contraction in the US and slower growth in the Eurozone, China and Emerging Markets (EMs) in Q1.

However, both the US and China rebounded in the second quarter. Notwithstanding these temporary factors, the ongoing global investment slowdown reflects increased uncertainty about the impact of an eventual rise in US interest rates and rising geopolitical risks.

Looking ahead, the global economy is likely to continue to stumble along unless these clouds are lifted from the investment horizon, says QNB Group.

Global economic growth in Q1 2014 was weaker than expected for a number of factors. First, the US registered the largest contraction (-2.1 percent) since Q2 2009, reflecting an inventory overhang and unusually cold weather. While this contraction was reversed in Q2 2014 (4.0 percent), US growth for the first half of the year as a whole was still relatively weak (0.9 percent) on weak investment spending.

Looking ahead, we expect US growth of only 1.0 percent-1.5 percent for 2014 as a whole as expectations of an eventual rise in US short-term rates weighs negatively on investor sentiments.

Second, growth in the Eurozone was barely positive (0.2 percent), reflecting stronger economic activity in Germany and Spain offset by virtually no growth in France and Italy.

The Ukraine crisis has added downside risks to the euro zone, given its energy dependence on Russian gas. We therefore expect Eurozone growth to reach only 1 percent in 2014.

Third, Chinese growth was somewhat lower than expected (7.4 percent) in Q1 on a slowdown in private demand following a tightening of domestic monetary conditions in the second half of 2013.

In response, the government passed another stimulus package, including tax breaks for small- and medium-size enterprises and an acceleration of infrastructure spending.

This stabilized growth at 7.5 percent in Q2 in line with the authorities' target for year as a whole, said the QNB Group's analysis.

"We expect this target to be met on the strength of the government's stimulus package like in 2013, but private sector consumption and investment are likely to slow further," it added.

Fourth, EM economic activity continued to slow, following the announcement of the Fed's intention to taper Quantitative Easing in May 2013 and the consequent tightening of financial conditions. Growth in Brazil virtually stalled (0.2 percent) in Q1 on tight monetary policy and political uncertainty. India's growth rate was temporarily boosted by election spending in Q1, but the new Modi administration faces significant structural challenges to reignite India's growth momentum. The same can be said for the new Jokowi administration in Indonesia.

Russia and South Africa's economies contracted in Q1 on the Ukraine crisis for the former and labor disputes for the latter. "Overall, we expect EM growth to be weak in 2014 (3.0 percent) on continued economic and geopolitical uncertainty weighing on investment decisions," the report said.

Looking ahead, uncertainty about the timing of higher US interest rates and geopolitical risks are likely to continue to weigh heavily on the prospects for the global economy. The global investment slowdown is partly due to the end of Quantitative Easing, where super-cheap money led to large flows of capital to EMs and risky assets. The eventual increase in US interest rate will inevitably lead to a reassessment of investment decisions and the price of certain asset classes.

The conflicts in Iraq, Libya, Palestine and Ukraine add significant geopolitical risks to this already weak outlook. Large disruptions to gas supplies in Eastern Europe or oil supplies in Libya and Iraq could put upward pressure on gas and oil prices and further dampen global economic growth.

Overall, the outlook for the global economy remains uneven and risks are tilted heavily on the downside, according to the QNB Group.

The eventual rise in US interest rates and geopolitical risks emanating from the conflicts in Eastern Europe and the Middle East are only likely to add to the global investment slowdown.

As a result, the global economy is only likely to continue to stumble along until these clouds are lifted from the investment horizon.

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Publication:Arab News (Jeddah, Saudi Arabia)
Date:Aug 10, 2014
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