Global Economic Outlook, Q1 2014

Clearly, the world is once again at a turning point, and it is the job of economists to figure out which direction things are moving. In this issue of the Global Economic Outlook, we examine the state of the global economy as 2014 begins.

Several countries have passed significant hurdles lately. In China, the government finally announced long-awaited reforms that are intended to change the structure of the Chinese economy and allow growth to continue at a rapid pace. In the United States, a severe crisis was averted, but a government shutdown did have a negative impact on economic activity. In Japan, inflation has returned, and there continue to be signs that Abenomics is having a positive impact. The Eurozone has exited from a long and deep recession. Finally, a number of major emerging markets have quickly gone from an environment of optimism about future growth to one of uncertainty. Clearly, the world is once again at a turning point, and it is the job of economists to figure out which direction things are moving. In this issue of the Global Economic Outlook, we examine the state of the global economy as 2014 begins.

We start with China. I provide a discussion about the proposed reforms and the potential impact they could have on economic performance and structure. I note that there remains uncertainty as to when or how these reforms will be implemented, or whether the government will generate sufficient internal support to make these reforms happen. Still, I conclude that “China could become more market driven, more consumer driven, more transparent, and more prone to invest in projects with a positive return.”

Next, we turn to the United States. Patricia Buckley writes about the crisis that never was, but the considerable impact that the government shutdown had. Moreover, Patricia notes the potential fallout if other budget crises emerge. Patricia also notes that while unemployment is declining, underlying weakness persists in the job market, and it may influence decisions by the Federal Reserve.

In our third article, Alexander Börsch notes that the Eurozone has come out of recession only to experience disappointing growth. He says that “growing at this speed will not be enough to heal the wounds of the recession.” Alexander goes on to discuss the three things needed to generate more robust growth: accelerating business investment, stabilized credit conditions, and less uncertainty.

Next, I review Japan’s economic situation. With inflation finally returning, it appears that Abenomics is having the desired impact. Indeed, a lower yen has boosted exports, and consumer spending has accelerated. However, that spending may be due to an anticipated tax increase. In addition, uncertainties about the potential impact of that tax increase as well as the degree to which the government will engage in deregulation are weighing on the country’s growth projections.

In our fifth article, Rumki Majumdar examines the Indian economy. She notes that India has lately experienced a period of slow growth, high inflation, fiscal deficits, external imbalances, and poor business confidence. In addition, political uncertainty has only added to such woes. Despite these problems, Rumki suggests that India has considerable assets, including human capital and a strong financial sector, which can be utilized to restore strong growth. She discusses policies that could effectively utilize these assets in the future.

Next, Akrur Barua discusses the disappointing growth of the Russian economy. He points to subdued investment, weak export markets, rising household debt, and declining confidence as contributors to the weak performance. Government stimulus spending, however, might alleviate some of the slowdown. Going forward, Akrur notes several challenges to faster growth, including increased global competition in the energy market, declining availability of cheap hydrocarbons, weak investment, and deteriorating demographics.

In our seventh article, Ian Stewart discusses the surprisingly robust recovery of the UK economy. Indeed, Britain is expected to have the fastest growing economy in Europe in 2014. Nevertheless, Ian notes that celebration may not be warranted, considering that growth remains low by historic standards and is only now about to exceed the modest growth experienced in 2007. In his article, Ian explains the reasons behind the recovery and discusses what must happen for growth to be sustained.

In our last geographic article, Navya Kumar examines the considerable weakness in the Brazilian economy. She notes the causes of the slowdown and suggests that the situation will not be turned around quickly. A combination of troubling factors is hurting Brazil, including deteriorating fiscal balances, an increasing external deficit, high inflation, poor business investment, and currency troubles.

In our first topical article, Navya Kumar and Akrur Barua consider the plight of commodity-exporting countries that now face a likely end to the commodity price boom of recent years. They discuss the experience of such countries, the causes for the reversal, and the implications for commodity-exporting countries. In addition, they offer some suggestions for how such countries might shift focus and diversify away from commodity dependence.

Finally, in our last article Rumki Majumdar asks if emerging markets are losing their brand appeal. She discusses the financial market volatility in emerging markets that followed the US Federal Reserve’s discussion about tapering. She then examines how countries responded to this “period of uncertainty” and why some countries have recovered more quickly than others. She suggests that countries with poor fundamentals and weak policies have fared worse than others. Clearly, this has implications for the types of policies that emerging nations ought to follow going forward.


Dr. Ira Kalish

Dr. Ira Kalish is chief global economist, Deloitte Touche Tohmatsu Limited.

Global Economic Outlook, Q1 2014: Introduction
Cover Image by Jessica McCourt