Things have certainly changed since our last report three months ago. Europe appears to be coming out of recession, China appears to be stabilizing, and the United States appears to be going back to square one. That is, after several months in which markets anticipated a shift in monetary policy, nothing actually happened. The Fed left policy unchanged. In Japan, the burgeoning success of Abenomics is juxtaposed against an impending tax increase. Finally, emerging markets, having seen a sizable slowdown in growth, and attacks on their currencies have been given a brief reprieve by the US Federal Reserve. Still, the short-term growth outlook remains modest at best.
In this issue of the Global Economic Outlook, we begin with Patricia Buckley’s take on the US economic situation. While acknowledging that the Federal Reserve was probably correct to view the US recovery as too weak to shift policy, Patricia offers hope that a rebound in residential construction might be the spark that ignites stronger growth in 2014. She worries, however, about the potential impact of congressional failure to provide a stable and predictable fiscal policy.
Speaking of Federal Reserve action, or inaction, Navya Kumar and Akrur Barua offer a perspective on the impact that expectations of Fed action already had on emerging markets. In addition, they discuss the likely outcome for emerging markets once the Fed ultimately moves to slow the pace of asset purchases. Navya and Akrur consider whether the current situation is similar to that of 1997, when emerging markets in Asia faced a financial crisis. They conclude that the situation is quite different and that, today, emerging markets are much better prepared to withstand external financial shocks. Navya and Akrur conclude that, while short term challenges exist, long-term prospects for emerging markets remain attractive.
Next, Alexander Börsch celebrates the end of the Eurozone’s long recession, but notes that growth remains less than spectacular. Alexander suggests that given various risks and obstacles, it is likely that Eurozone growth will remain “slow and bumpy.” He notes that among the risks to Europe, are a slowdown in emerging markets, continuing troubles in Europe’s credit markets, and persistently high unemployment—the latter potentially undermining political stability.
In our next article, I offer my point of view on Japan. So far, Japan’s economic performance in the wake of the new economic policy has actually been quite good. Growth has been strong, and various economic indicators are hopeful. Among them are increased equity prices, a lower yen, increased inflation, and the strength of exports. Yet I also note the risk stemming from the impending increase in the national sales tax, and I discuss the various policy options that the government might implement to offset the negative impact of the tax increase.
On China, I discuss the various economic indicators that suggest a stabilization of Chinese growth after a period of deceleration: strong industrial production, exports, and rebounding credit creation. On the other hand, I discuss the risk of credit expansion, the tools that the government might use to improve bank safety, and how the property price bubble has been exacerbated by the failure of the financial system to offer good investment opportunities for savers. The end result, of course, is that banking reform is critical, an issue that will be top of mind when the leadership meets in November to discuss a reform agenda.
Next, the chief economist for Deloitte UK, Ian Stewart, provides his assessment of the outlook for the British economy. Ian notes how much things have changed in recent months and how the British economy appears to be on the mend. Indeed, there is now concern that the housing market is exhibiting signs of a bubble. Ian says that positive external factors have played a role. These include an easing of economic stress in Europe and recovery in the United States. He concludes that “cheap money and the absence of big external shocks are working their magic.”
Our examination of the remaining BRICs begins with India. Rumki Majumdar says that economic growth continues to decline, inflation remains too high, fiscal discipline is declining, the external deficit is widening, and business confidence is poor. Moreover, a new central bank governor is focusing first on inflation and financial stability rather than growth. The result is that the best path forward for India involves structural reforms that have yet to be legislated or implemented. However, Rumki notes that the recent Federal Reserve decision to postpone a shift in policy provides India with a bit of breathing room. On the other hand, Rumki worries that significant reform will wait at least until after the election in 2014.
As Navya Kumar notes in our next article, Brazil also faces the challenge of slow growth, excessive inflation, and a deteriorating external balance. She says that, despite a rebound in growth in the second quarter, the outlook remains troubling. Despite slowing growth, the central bank has tightened monetary policy in order to stabilize the currency and fight inflation. Plus, the government is tightening fiscal policy in order to maintain fiscal probity. The main hope for better performance rests with prospects for freer trade, especially with the EU.
Finally, Akrur Barua examines the Russian economy. Like many other emerging markets, Russia faces a difficult time. Growth has been slowing in recent quarters, with investment weakening and exports performing poorly, owing to weakness abroad. Moreover, excessive reliance on hydrocarbons means that falling energy prices are harmful to growth. With inflation running relatively high, the central bank is not likely to significantly loosen policy. Plus, fiscal policy is likely to be tightened. Finally, foreign direct investment has dried up, and funds are flowing out of the country. Thus, the outlook appears troubling.