Despite faltering near the end of 2013, global growth is likely to continue its upward momentum.
Despite faltering near the end of 2013, global growth is likely to continue its upward momentum.
Bad weather in the Northern Hemisphere, rather than poor performance, can explain much of the softness expressed in business surveys in several major advanced economies at the end of last year.
This was most notable the US, where the extreme winter disrupted production schedules. However there are few signs of a downturn in the underlying level of business confidence or demand. In fact the forward-looking questions found in business surveys in that country (focused on firms’ expectations of future trading conditions) suggest the industrial upturn is set to continue.
Interest rates look set to remain very low in the big advanced economies for some time yet. The US Federal Reserve has said that it looks likely to keep interest rates low well past the time when the jobless rate falls below 6.5 per cent, provided that inflationary pressures are under control.
The Fed can be expected to begin lifting its funds rate in the latter half of next year. Ahead of that, the central bank should continue to gradually wind back new asset purchases (tapering) through the rest of 2014.
Other central banks look set to keep their policy rates low as well. The European Central Bank faces inflation running well below its target rate and is keeping its policy rates at or below their current level for “an extended period of time”.
Growth
The pace of global growth picked up steadily through 2013 – from 2.5 per cent year on year at the start of the year to 3.6 per cent year on year by the December quarter.
Recovery in the big advanced economies accounted for this global upturn, with their growth rising from only 0.5 per cent year on year in March to just more than 2 per cent year on year by December.
Growth remained stable in both China and India through 2013 while there was a modest acceleration across Latin America and the emerging economies of East Asia. The recovery in advanced economies has varied across sectors, with industry generally outperforming the service sector (held down by consumer caution and government cutbacks).
February figures
The average pace of growth in service sector business activity in the big advanced economies dipped very slightly in February, but the results were still consistent with solid growth.
Looking at individual economies, February growth in service sector activity slowed noticeably in the US (possibly weather affected) and Japan. The UK service sector was strong and essentially unchanged, while the eurozone improved.
Asia
The pace of Indian economic growth in December quarter was 4.7 per cent year on year, below market expectations and slightly slower than recorded in the previous quarter. This outcome lines up with the poor performance shown in monthly output and international trade data from late 2013, where there was no sign of a rebound in activity.
Nevertheless, the main business surveys are pointing to an upturn starting in the first half of 2014.
The official Chinese data is held up by the usual start of the year delay but the monthly industrial business surveys for early 2014 are consistent with trend slowing in manufacturing. Elsewhere in East Asia, slow growth continued into early 2014 for exports and industrial output.
Global growth is forecast to rise from last year’s 3 per cent to 3.5 per cent this year and then reach an around-trend 3.75 per cent in 2015. Growth in the emerging market economies is expected to barely pick up as the predicted slower growth in China offsets faster expansion elsewhere.
However, Chinese forecasts need to be reviewed in the light of the recently announced 7.5 per cent official growth target for 2014. Although the emerging economies still drive most of the world’s increase in output, the contribution of the advanced economies is recovering to more normal levels.
Alan Oster is group chief economist at National Australia Bank.
