Global Economy Reviews

08.12.2014 15:18 World Economy Review - November 2014 The World Bank has revised its growth projections for Russia from 0.5 per cent up to 0.7 per cent in 2014 and from 0.3 per cent down to zero per cent in 2015, as part of its quarterly forecast review, the bank announced on December 2. The numbers are an update to the projections released in the Russia Economic Report 32 of September 2014. The main reason for the 2014 revision is stronger than expected net exports, with imports decreasing at a faster rate than anticipated due to the sharp depreciation of the rouble in recent months. Higher prices for imports reduced demand by households and firms. Some temporary import substitution potential created by the weaker Ruble accelerated manufacturing activities, but is unlikely to be sustained next year given frail domestic demand. “Growth is projected to stall in 2015 at zero per cent as the sanctions would continue to negatively impact investments and would lead to a further slide in consumption growth,” Birgit Hansl, World Bank Lead Economist for the Russian Federation, said on December 2. “If geopolitical tensions subside and the overall external environment of Russia improves, in 2016 the positive effects would allow for growth of 0.5 per cent,” Hansl said. The main driver for the lower 2015 growth projection is the assumption of a lower average oil price for 2015 of US$85 per barrel (compared to US$99.5 per barrel in the Bank`s September 2014 estimates), while the negative impact of sanctions and policy uncertainty on investment and consumption activities is expected to take hold more noticeably. Consumption growth is projected to come to a standstill.

Investment growth is expected to remain negative due to restricted access to external capital and higher borrowing costs. The World Bank`s revised 2015 forecast assumes that net exports will become the main contributor to growth, replacing consumption growth as the key growth driver of previous years. “We expect that until mid-2016 net exports will support growth most. Only in 2016 do we project the possibility that investment and consumption growth starts its gradual recovery and begins to contribute positively to growth again,” Hansl said. On balance, the revised World Bank outlook remains subject to significant downside risks, which could stem from continued high volatility of the international oil market and international financial markets in line with an uneven and subdued global recovery. 09.11.2014 17:41 World Economy Review - October 2014 The eurozone is struggling to revive itself, and may slip into recession in the next two years, slowing down the global economic recovery, according to the French Economic Observatory (OFCE).

The director of the OFCE`s analysis and forecast department, Xavier Timbeau, presented his economic predictions for 2014-2015 on 29 October, saying "the eurozone is a problem for the global economy". The expert believes that the eurozone is acting as a brake on the world economy, and will enter into "a phase of low inflation or even deflation in certain countries," leading to a eurozone recession within two years. The Observatory`s economists say this change will be slow, but almost inevitable. Germany, the mainstay of the eurozone, is expected to see limited economic growth of 1.5% in 2015 (with 1.4% forecast for 2014). The prognosis for Italy is also disappointing: it is expected to go into recession. Spain, where unemployment remains at 25%, is the only eurozone economy where economic growth is expected to rise, with 2.1% percent predicted for 2015. After a period of revival in 2011, the recovery of the eurozone has been sluggish. Timbeau attributes this to budgetary decisions taken by member states and to "the toughening of monetary conditions in 2013-2014". Even if economic constraints are loosened, the effects of austerity measures from 2012 and 2013 continue to weigh the economy down.

The Observatory claims to be "moderately optimistic for 2015," foreseeing eurozone growth of 1.3%. The OFCE economists are sceptical about the future European Commission President`s investment plan. Xavier Timbeau said that "Jean-Claude Juncker`s investment plan will be expertly put together from existing measures, but it will not contain anything new". The OFCE expects to see a slight improvement in the French economic situation in 2015, predicting growth of 1.1%, compared with 0.4% in 2014. This change is due to "the decline of two negative factors that have stifled economic growth since 2010: borrowing conditions and the reductions of deficits". "France should also become more competitive as the euro drops in value, and the tax credit for encouraging competitiveness and jobs (CICE) becomes more powerful," the OFCE said.

This moderate improvement in the situation will not be enough to bring down unemployment or have a significant impact on public deficits. The Observatory foresees an unemployment level of 9.8% and a public deficit of 4.3% for France in 2015. Finally, Xavier Timbeau believes that the presentation of France`s 2015 budget was "rather clumsy". He said that France was making an effort, but that some of the measures outlined in the budget were questionable, such as the anticipated lowering of interest rates, which would bring down the total cost of borrowing in 2015. "This is not a structural change that should be brought about through the budget," the economist said, adding that the Commission`s acceptance of this bill demonstrates just how fed up everyone is with the French budget. 05.10.2014 17:07 World Economy Review - September 2014 It has been a consistent theme in recent months that global growth has been slowing, a fact some investors may have missed in the good news about American GDP. The latest confirmation came from the World Trade Organization, which cut its forecast for trade growth this year from 4.6% to 3.1% and for 2015 from 5.3% to 4%. The WTO doesn`t forecast economic growth directly; it takes its lead from other international organizations.

What is interesting from the WTO announcement is that even the revised forecast relies on a bit of optimism. Actual trade growth in the first half of the year was just 1.8%; the organization is relying on a rebound in the second half. The first half regional numbers were revealing; Asia increased its exports by 4.2% but its imports by just 2.1%. In effect, it has been gaining market share. North America was more balanced, increasing exports by 3.3% and imports by 3%. Europe was predictably sluggish, increasing exports by 1.2% and imports by 1.9%. The real weakness came in South America which suffered a 0.8% fall in exports and a 3.4% decline in imports. All told, developed economies provided the biggest share of demand; their imports rose 2.6% while those of developing economies increased by just 0.5%. In export terms, the developed economies continued to lose market share; their exports grew 1.6%, while those of developing economies grew 2.1%. Sluggish growth in 2014 would confirm the recent trend. After a phenomenal rebound in 2010, trade growth slowed to 2.3% in 2012 and 2.2% in 2013. So what is going on? Part of the problem is the slowdown in emerging market growth detailed in a recent issue.

In turn, this may be related to slowing Chinese demand for commodities (incidentally, Goldman cut its Chinese GDP forecast for 2015 from 7.6% to 7.1%); commodity prices have been very weak recently, with the widely-followed Bloomberg index dropping 12% since the end of June. Then there may be specific problems this year; the winter weather that seems to have hit US first quarter growth; the Japanese sales tax rise; the sanctions tit-for-tat between the west and Russia. But it is still striking that most people think the bond markets are mispriced when a fall in commodity prices, weak inflation numbers in the developed world and those growth revisions would seem to form a pretty good backdrop for fixed income. The continued resilience of equity markets (despite yesterday`s wobble) looks more of the odd one out. 04.09.2014 14:25 World Economy Review - August 2014 The UK has edged up the global rankings in a major annual survey by the World Economic Forum (WEF). Its Global Competitiveness Report sees the UK rise one spot to ninth on the list, while Switzerland and Singapore retain first and second place. The US improved its competitiveness position for the second consecutive year, climbing two places to third. But the WEF warns that the global economy`s health is at risk, despite years of monetary stimulus and reforms.

Each year, the WEF, best known for its annual Davos economic meeting, benchmarks countries against 12 factors, including infrastructure, education and training, labour market efficiency, technological readiness and innovation. The aim is to produce a comparative picture of what is driving competitiveness, productivity, and prosperity in 144 countries. The UK wins plaudits for adopting technology to enhance productivity, and for its general business environment. Finland (4th) and Germany (5th) both drop one place. Among emerging market economies, Saudi Arabia (24th), Turkey (45th), South Africa (56th), Brazil (57th), and India (71st) all fell in the rankings. But China (28th) rose one position. The report said that that top-ranked countries had common factors driving competitiveness. "The leading economies in the index all possess a track record in developing, accessing and utilizing available talent, as well as in making investments that boost innovation. "These smart and targeted investments have been possible thanks to a coordinated approach based on strong collaboration between the public and private sectors," the report said.

In Europe, the report warns of a widening split between countries in the South and North. "While the divide between a highly competitive North and a lagging South and East persists, a new outlook on the European competitiveness divide, between countries implementing reforms and those that are not, can now also be observed," the WEF said. The report also sounds a warning that the health of the global economy is at risk, despite years of what the WEF calls "bold monetary policy". It saw "uneven implementation of structural reforms across different regions and levels of development as the biggest challenge to sustaining global growth". Klaus Schwab, founder and executive chairman of the WEF, added: "The strained global geopolitical situation, the rise of income inequality, and the potential tightening of the financial conditions could put the still tentative recovery at risk and call for structural reforms to ensure more sustainable and inclusive growth." Russia has reached the 53rd place against the 64th place out of 144 countries in the global competitiveness rating of the World Economic Forum (WEF), but repercussions of the situation in Ukraine may worsen the country`s rank. The jump is attributed to some improvements linked with efficiency of the local market of goods and services, exploitation of information and communications technologies and separate competitiveness of local companies, according to the report. Russia`s economy has been experiencing a great number of deep-rooted problems that must be solved to raise the country`s competitiveness. Among the most serious problems, the forum`s senior economist Benat Bilbao-Osorio highlighted the existence of monopolies and oligopolies, which prevents other companies from entering the market, and insufficient investments into innovative development.

The Ukrainian conflict may have considerable negative influence on the level of competitiveness of both economies of Russia and Ukraine due to their size and importance, Bilbao-Osorio said, commenting on the report. Ukraine was ranked 76th, up from 68th. 04.08.2014 19:56 World Economy Review - July 2014 The International Monetary Fund has cut its global economic growth forecast for 2014 because of weakness in the world`s two biggest economies. The IMF says the global economy will grow by 3.4 per cent this year, down from its April forecast of 3.7 per cent. The IMF expects global growth to accelerate to 4.0% in 2015. The revision reflects a weak first quarter in the US which makes up almost a quarter of global GDP. The IMF now expects the US economy to grow at 1.7 per cent in 2014, which would be the weakest rate since the country`s recession officially ended five years ago. That is down from its April prediction of 2.8 per cent, mostly because of a severe cold snap in the first quarter.

The US economy shrank at an annual rate of 2.9 per cent in the first three months of the year. IMF chief economist Olivier Blanchard says it is unlikely that weakness will be repeated. "It looks like a one off... which is due to an unusually harsh weather," he said. "So factors which do not have obvious implications for the future, but just explain why growth was so bad in that quarter." The IMF`s forecast for China has also been lowered to 7.4 per cent from 7.6 per cent, with problems in the country`s housing market noted.

Among the so-called BRICS countries of Brazil, Russia, India, China and South Africa, India was the only one to avoid a downgrade. Among those developing economies, the biggest reduction was for Russia`s growth, as a result of investors pulling money out of the country because of its involvement in the conflict in Ukraine. Russia`s economy is now expected to grow at a rate of 0.2 per cent from 1.3 estimated previously. Dr Blanchard says the IMF`s Russia forecasts exclude the effects of recent sanctions the US has imposed on the country. "These sanctions could probably further decrease the growth rate of Russia," he said. The IMF said there were bright spots in the global economy which included growth pick-ups in Japan, Germany, Spain and the United Kingdom. The organization expects the Euro area to expand 1.1%, and Japan to gain 1.5%. However, the fund says geopolitical risks from the crises in the Middle East and Ukraine could dent growth further and hinder the global recovery. "Robust demand momentum has not yet emerged despite continued very low interest rates and easing of brakes to the recovery, including from fiscal consolidation or tight financial conditions," the IMF said.