UN lowers world economic growth forecast

The rates are revised downward due to deterioration in the growth prospects of developing economies and those of transition economies.

By Kanaga Raja

The world economy is expected to accelerate over the next two years, with updated growth rates of 2.8% in 2014 and 3.2% in 2015, the United Nations has reported.

In its mid-year update of the ‘World Economic Situation and Prospects 2014’, the UN said that these updated growth rates are slightly lower than its earlier forecast made in January.

In its January report, the UN had forecast the global economy to grow at a pace of 3.0% in 2014 and 3.3% in 2015).

According to its latest report, a downward revision has been made mainly in the growth projections for developing economies and the economies in transition, as the situation in a number of countries in these two groups has somewhat deteriorated.

With the projected growth rates of 4.7% and 5.1% for 2014 and 2015 respectively, developing countries as a whole will continue to contribute a large proportion to global growth.

However, this growth trajectory is lower by two percentage points than what the developing countries had registered for a number of years prior to the global financial crisis,” said the UN, noting that the downward revision in the growth for the economies in transition is even more pronounced.

As demonstrated in the two recent episodes of financial turbulence in mid-2013 and early 2014, a number of developing countries are vulnerable not only to the international spill-overs from the adjustments in monetary policies by major developed countries, but also to quite a few country-specific challenges, including structural imbalances, infrastructural bottlenecks, increased financial risks, incoherent macroeconomic management, as well as political tensions, said the report.

Growth in the developed economies is projected to be 2.0% and 2.4% for 2014 and 2015 respectively, about one percentage point higher than in the previous two years. For the first time since 2011, all major developed economies in North America, Europe and developed Asia are aligned together on the same upward growth trajectory, forming, hopefully, a virtuous cycle to reinforce their recovery, said the UN.

Nevertheless, after five years of being mired in the aftermath of the financial crisis, these projected growth rates are insufficient to recuperate the output and job losses in most of these economies.

They are still confronting a number of challenges, including the remaining fragilities in the euro area, the elevated unemployment rates in some of these economies and unsustainable public finances in the longer run,” it added.

Improvement

Turning to international trade flows, the UN reported that world trade growth has been flat in the first quarter of 2014, but that some gradual improvement is expected over the course of the year as import demand in major developed countries continues to gradually increase.

Real exports are forecast to grow by 4.1% in 2014, almost twice as fast as in 2013, but still below the pre-crisis trend of double the global output growth. Further improvement is expected to continue into 2015, with export growth rising to 5.1 per cent.

With respect to capital flows, the report said that as the United States Federal Reserve (the Fed) gradually scales back its monthly asset purchases, developing countries and economies in transition have seen a marked reduction in capital inflows in 2013 and early 2014, remaining exposed to sudden changes in financial market sentiment. However, the episode in early 2014 differed from the one in mid-2013 in several respects.

First, said the UN, the abrupt change in market sentiment was not triggered exclusively by a shift in views about the Fed's policy path, but by a combination of factors, including fears of a larger-than-expected slowdown in emerging economies. Second, the recent sell-off of emerging market assets was mainly limited to equities, reflecting a flight to safety, with long-term United States interest rates retreating. Third, the latest market correction was smaller and shorter in duration, with investors discriminating more among emerging economies.

In its outlook, the UN said that capital flows to emerging economies are projected to pick up slowly from the low levels seen in recent quarters, in line with the expected recovery in global growth. However, significant uncertainties and downside risks stem from the interaction between perceptions of the Fed's tightening path and the idiosyncratic weaknesses in some emerging markets.

Highlighting economic trends by region, the report said that in the United States, the growth momentum built in the second half of 2013 weakened notably in the first quarter of 2014, mainly because of inclement weather, but growth is expected to pick up going forward, with GDP expected to grow by 2.5% and 3.2% in 2014 and 2015, respectively.

Less restrictive

Private consumption and business investment are expected to increase at a stronger pace than in the past two years, along with a continued improvement in the labour market and the housing sector. Monetary policy is expected to remain highly accommodative during 2014 and into 2015, while fiscal policy will be less restrictive than in the previous year. The external conditions for the United States economy are expected to improve, but only slightly, as foreign demand from major trade partners is expected to remain relatively weak,” said the report.

The Japanese economy expanded by 1.5% in 2013 and is projected to expand by 1.4% and 0.9% in 2014 and 2015, respectively. The fiscal stimulus package introduced in 2013 supported growth, but this stimulus is set to fade out. In April 2014, with an increase in the sales tax, the Government has also provided for more expenditure through a supplementary budget, but the magnitude is not enough to fully offset the negative impact of higher taxes, said the report.

Western Europe emerged from recession in the second quarter of 2013, whereby in the EU-15, GDP is expected to grow by 1.5% in 2014 and 1.8% in 2015.

The report said that since the announcement of the European Central Bank's Outright Monetary Transactions facility in September 2012, financial tensions in the region have subsided significantly and confidence has rebounded. Fiscal austerity programmes have lessened in intensity and balance sheet repair, while ongoing, is also less of a drag on activity.

The recovery remains weak, with GDP still below its pre-crisis level,” said the UN, adding that the weakness of the recovery is also a major factor behind the dire unemployment situation, in that in the EU-15, unemployment was 11.1% in 2013 and is only expected to stabilise in 2014, before coming down to 10.6% in 2015.

Modest pick-up

With regards to the new EU member states, the UN reported that the recovery in these economies is firming against the backdrop of stronger activity in the EU-15, a modest pick-up in domestic demand, less fiscal drag and a turnaround in the inventory cycle.

All countries in the region are expected to register positive growth in 2014, with the exception of Croatia.

According to the report, the CIS (Commonwealth of Independent States) region continues to face a challenging international environment and, in addition, many countries are confronted with domestic challenges and risks.

Disruptions

Among developing economies, Africa will continue to see solid growth of 4.2% this year, although political problems in a number of countries have led to a downward revision compared to the previous forecast, said the UN, citing the example of Libya where disruptions to oil output and exports will be a major drag on growth, underpinning a significantly lower growth rate for North Africa than previously forecast.

In 2015, overall growth (in this region) will accelerate to 5.1%, carried by some rebound in North Africa in view of a recovery of oil exports in Libya and stronger growth in South Africa underpinned by solid export demand and increasing consumption and investment.

East Asia is expected to see robust growth as exports to developed countries strengthen and domestic demand in most economies remains firm."

– Third World Network Features