Global Economic Growth Forecast Not Great Until 2014

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Economist Intelligence Unit Economic Forecast graphs

Source: The Economist

Towards the end of the year, our thoughts naturally turn to the year ahead and the prospects before us.

Recent years have been somewhat mixed at year’s end — last year there was a growing optimism that metal prices were picking up and an expectation in many quarters that growth would be better in 2012.

As it turned out, prices picked up strongly in the first quarter but took a dive towards mid-year. 2012 has been marked by political uncertainty and 2013 is likely to see much of the same, according to the Economist Intelligence Unit (EIU) in its year end report.

The two overriding considerations are the fiscal cliff negotiations in the US and Europe’s debt crisis.

The EIU sees these continuing to hold back growth in the first half of 2013, but from mid-year a resolution to the US fiscal negotiations should be largely settled — avoiding a $600 billion fiscal squeeze — and Europe should have agreed on who needs bailouts and who doesn’t, even if the region remains locked in a two-speed growth pattern (largely the north showing modest growth and the south suffering severe contraction and high unemployment due to German-imposed austerity measures.)

The EIU expects global GDP to expand by 2.3 percent at market exchange rates in 2013 and by 3.4 percent at purchasing power parity (PPP) exchange rates, which give more weight to emerging markets. This is down sharply from the EIU’s forecast ten months ago for 2013 GDP growth of 3.9 percent (in PPP terms).

Much of the fall has come from emerging markets apart from China—India and Brazil, in particular, are expected to grow much more slowly than previously. They have also slashed the 2013 GDP forecast for Japan during the course of the year. The drop is also due to a re-assessment of growth prospects for the first quarter, which have been scaled back, making the whole year’s aggregate growth lower.

For example, the EIU expects the US economy to post a fourth-quarter 2013 growth rate of at least 3 percent, well ahead of the annual average of 2.1 percent, and for China to be expanding in the second and third quarters at something close to a 9 percent rate, ahead of the full-year average of 8.5 percent.

Many firms have held off investing and hiring due to uncertainties around growth next year and the likely taxation environment. From mid-year these will be clearer and should see release of some of the large cash balances held by firms on their books as new investment.

All this, in the EIU’s opinion, will set the scene for stronger growth in 2014. Let’s hope they are right — much depends on lawmakers, both in the US and Europe, reaching agreement on solutions to their respective problems.

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