Global Economic Outlook Q3 2013

The global economy continues to grow at a modest pace. Europe remains in recession, US growth remains subpar, and the major emerging markets face slower growth.

The global economy continues to grow at a modest pace. Europe remains in recession, US growth remains subpar, and the major emerging markets face slower growth. Meanwhile, global financial markets have faced considerable volatility, owing to prospective changes in US monetary policy, a new policy in Japan, and instability in China’s banking system. Indeed, Asia has been at the forefront of economic news in the latest quarter. Troubles in the Chinese financial system and volatility in Japan’s financial system have been leading the headlines in recent months.

In this edition of the Global Economic Outlook, we examine the major issues confronting the global economy and discuss the likely outcome. We begin with my discussion about China. I explain the recent structure of the banking system, how the shadow banking system grew so rapidly, and the reasons why troubles emerged recently. I also discuss the response of the authorities and what must happen in the future in order to restore growth and financial stability.

In the next article, I discuss Japan’s new economic policy, known as Abenomics, and the reasons why financial markets became quite volatile in June. I also discuss how the economy appears to be performing better in the aftermath of the new policy. I also look at the outlook for the Japanese economy and the conditions that must be met in the long run in order for the new policy to succeed.

In our next article, Patricia Buckley attempts to explain Ben Bernanke’s attempt to explain his policy intentions. Bernanke’s recent comments on the possible future path of monetary policy set off a rather notable round of financial volatility. Patricia examines the impact of monetary policy and the likely outlook for the US economy. She also discusses the impact of fiscal policy.

In his review of the Eurozone outlook, Alexander Boersch notes the difference in performance between European financial markets and European economic growth. Financial market health has improved, in large part due to ECB policy. Yet the economy remains mired in recession. Alexander says that Europe’s economy is too dependent on exports, especially to emerging markets, and must have other sources of demand in order to generate sustainable growth.

Next, Alexander focuses on the long-neglected European consumer and the role that consumers will play in the outlook for the Eurozone economy. Alexander suggests that the European consumer remains hobbled by debt and continues to engage in deleveraging. As such, it is unlikely that they will play a major role in economic recovery. Rather, other sources of growth, including investments and exports, will be required.

In his article on the British economy, Ian Stewart suggests that Britain may be turning the corner. He notes that the consumer sector and the corporate sector have both shown unexpected strength. Ian notes that an aggressive monetary policy has provided the fuel for consumer wealth, consumer spending, and better credit market conditions. On the other hand, he says that the economy continues to face substantial headwinds from global weakness, tight fiscal policy, and global financial market volatility.

In her article on India, Rumki Majumdar says that, while the old challenges to India’s economy continue, new challenges are emerging. The end result is that the outlook for growth is not good. Among the challenges are uncomfortably high inflation, a big budget deficit, a large external deficit, and capital flight, which resulted from actions by the Federal Reserve in the United States. Capital flight has contributed to currency depreciation, exacerbating inflation and constricting the ability of the central bank to ease policy.

In our next article, Akrur Barua provides a discussion about the Russian economy. He notes that the main strength of the Russian economy has come from the consumer sector. Increasing wages and consumer willingness to borrow have fueled spending growth. However, high inflation has led the central bank to tighten lending conditions. Moreover, muted global demand for commodities has had an adverse effect on growth. The outlook, therefore, remains uncertain.

Finally, Navya Kumar looks at the Brazilian economy, which is struggling to grow. The rapid shift from strong to weak growth has certainly taken a toll in terms of popular discontent. Mass demonstrations reflect frustration with poor infrastructure, corruption, and inefficiency. Sadly, the outlook is hampered by high inflation, weak overseas demand, and volatile and interventionist public policies that have hampered business investment.


Dr. Ira Kalish

Dr. Ira Kalish is chief global economist of Deloitte Touch Tohmatsu Limited.

Global Economic Outlook, Q3 2013: Introduction
Cover Image by Jessica McCourt