THE BLOG

Global Forecast: Softer Recovery Prospects

29/04/2013 14:13 BST | Updated 28/06/2013 10:12 BST

Our latest global forecast for the world economy shows prospects for steady gains in global economic growth throughout 2013 fading, amid signs that the recession in the euro zone is worse than expected and that China's recovery has stumbled. Although the US economy is performing quite well in the face of fiscal tightening, a synchronised global upturn is now looking less likely in the next six months. In the light of recent data, the Economist Intelligence Unit this month has lowered its forecast for global economic growth in 2013-14. We have also trimmed our GDP forecasts for the euro zone, China, Brazil and Russia.

We now forecast that world GDP, measured at market exchange rates, will grow by just 2.1% in real terms in 2013. This is a small but significant change from our previous forecast of 2.2%, as it now means that growth in 2013 will be no better than in 2012 and that the global recovery has in effect lost momentum. The picture is more encouraging if one looks at GDP on a purchasing-power parity (PPP) basis. The PPP measure gives greater emphasis to emerging markets, which--despite some wobbles--are generally growing more quickly than rich-world economies. Yet we have still trimmed our PPP forecast to growth of 3.1% in 2013, from 3.3% last month.

These changes reflect a number of negative developments for the global economy. The euro zone tops our list of concerns. Although the crisis in Cyprus--the latest euro member to need a financial bail-out--has so far resulted in little or no contagion to other struggling countries, conditions in the real economy range from difficult (Germany) to dire (Greece). Although the tail risk that the euro zone will collapse has subsided, there is no growth momentum. Even previously resilient euro member economies have weakened in early 2013, and we expect little improvement before 2014 because of austerity.

Several other major economies have encountered soft patches. China's first-quarter GDP data, released on April 15th, were subdued, as property investment disappointed and as a government anti-corruption drive illustrated the law of unintended consequences by dampening retail sales. We have lowered our forecast to 8% growth in 2013 (from 8.4% previously) and expect growth at a slightly slower 7.8% in 2014. In Russia, a range of output indicators deteriorated further in early 2013 and the outlook is more subdued there. The other BRIC stalwarts, Brazil and India, have also been struggling but are poised for improvement in 2013.

One exception to this gloomy picture is the US, which is showing resilience on a broad range of fronts despite ongoing fiscal tightening. Housing and construction are strengthening noticeably, business investment is holding up, and unemployment has eased to a post-crisis low of 7.6%. Our US GDP growth forecast, at 2.1% in 2013 and unchanged this month, marks the country out as likely to be one of the best performing of the large developed economies in 2013 and 2014. We forecast growth there of 2.4% in 2014.

Political tensions are adding to the risks to global recovery, with heightened North Korean belligerence of particular concern given neighbouring South Korea's status as a major industrial economy closely integrated into the global supply chain. Political tensions over the debt crisis in the euro zone are also still very much in the frame, and will remain so given the approach of the German federal election in September.

We continue, nonetheless, to expect global economic growth to improve in 2014. US GDP growth will accelerate as momentum in the second half of 2013 carries over into next year. The euro zone, too, should have stopped contracting and can be expected to record weak positive growth in 2014 as a whole. We forecast world GDP growth of 2.7% at market exchange rates and 3.8% at PPP rates in 2014.