Recent Developments in the World Economy

The first part of the WEO, which gives a broad overview of what’s happened since the previous WEO released in April, is (very) briefly summarized in layman’s terms below.  A technical note: any mention of rates of growth (positive and negative) refers to the annualized rate of growth of output, or GDP, in an economy (GDP isn’t the only measure of output that exists but it is what’s used here).  You can think of output, or GDP, as a measure of aggregate economic activity.  We care about growth in GDP because it leads to more employment (to meet the needs of the expansion of economic activity), and, generally speaking, a higher standard of living.  You can read a more thorough discussion of GDP growth here.

Global growth in the first half of 2014 was lower than the April WEOs projection by 0.4%.  That was the general trend, but the story varies by country:

Losers

  • Brazil – Negative growth so far this year (two consecutive quarters, which technically qualifies as a recession) due primarily to a lack of investment and confidence
  • France – No growth in output, reflecting fiscal imbalances and declining competitiveness
  • Italy – Contraction of output, albeit small, for Q1 and Q2, high unemployment (youth unemployment is at its historical peak) issues stemming from tight financial conditions (basically no credit available and thus no investment either)
  • Russia – Lack of growth is, not surprisingly, a result of insufficient investment and confidence

Winners

  • China – Relatively strong growth in Q1 despite issues in credit and housing markets that Chinese officials successfully subdued (via lowering required reserves and credit easing aimed at small and mid-size firms) for higher growth in the subsequent quarter
  • India – Stronger growth is resuming after a protracted downturn thanks primarily to much-needed investment
  • United Kingdom – Relatively strong growth (‘strong’ in comparison to what was expected in recent years, but considerably less than growth in China in India in raw number), and a strengthening labor market due to increased business investment

Investment is, unsurprisingly, prevalent in healthy economies and positively related to confidence.  If you’re surprised investors are wary of putting money into Russian markets then you must have been under a rock while Russia invaded Ukraine, and if you’re surprised about Brazil, maybe you didn’t know that it’s run by a feckless imbecile who just (barely) survived reelection.  Just as lack of investment and confidence hampers growth, India proves that  investor-friendly reforms spur investment, and the U.K. has recovered almost completely from the crisis thanks to business investment.

Those were the extremes – the rest of the world falls somewhere in the middle.  The United States economy is strengthening, but expected growth has necessarily been revised downward to adjust for the surprising contraction in the first quarter, largely a reflection of temporary factors (harsh weather, inventory accumulation in Q4 ’13, decline in exports), that won’t affect the future much.  In Japan growth continues along weak yet stable path, as the country’s enormous level of public debt inhibits its ability to grow too much despite good signs elsewhere in the economy.  Output nearly stalled in the Euro area as (mostly periphery) countries struggle to emerge from the recession, while some are achieving modest growth (Spain and Germany mainly).

Inflation is below targets in advanced economies which means they’re operating below their potential; meanwhile, inflation in emerging markets hasn’t changed.  Monetary policy is easy/accomodative in advanced economies and will continue to be as the ECB is slated to implement new policies, including targeted credit easing, and the Fed has made clear that it will aim to keep rates low for some time despite having wrapped up its asset purchase program last month.  In response to the Fed’s plans, financial conditions have eased and long term interest rates have decreased a bit, compared to data in the April WEO.  Risk premiums are low and volatility is low in advanced economies, which has some worried that risk is underpriced – but more on risk and its implications in a separate post.

So the global rate of growth or inflation or any other metric doesn’t convey much useful information because conditions are anything but  uniform across countries.  The story of the recovery is and will remain fragmented, with different problems and strengths contributing to a given market’s recovery.  That being said, all economies can expect to adjust to a level of growth that pales in comparison to the growth of the early 2000s.  Potential output, which has been revised downwards for the past 3 years, is too low for the growth rates of old to materialize.  This is due to the legacy of the recession in advanced economies, but growth-limiting structural issues also plays a role in developing economies.  For more on that, directly from the IMF, watch the short video linked below.

http://bcove.me/tcz9ghm8

About schapshow

Math & Statistics graduate who likes gymnastics, 90s alternative music, and statistical modeling. View all posts by schapshow

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