Global economic outlook: emerging market headwinds
Global gross domestic product (GDP) growth is expected to improve from 2.6 per cent in 2013 to 3.1 per cent in 2014, with two thirds of global growth coming from emerging countries, despite ongoing pressure in these markets. This is according to international credit insurer, Coface, which suggests that the upward global trend will be driven by the recovery in the Euro zone and higher growth prospects in the United States and in the United Kingdom.
While advanced economies see renewed growth, some large emerging markets, mainly China, Brazil, Russia, and Turkey, are expected to slow again in 2014. “Exports are likely to rebound on the back of higher growth prospects in advanced economies and lower exchange rates, however, some large emerging economies are suffering from supply-side constraints weighing on private investment,” Coface reported in its 2014 global economic outlook communication.
According to the insurer, reasons for this structural shift in growth include infrastructural weaknesses limiting growth in certain large emerging markets including India and Brazil; poor governance and political tensions in cases such as Russia, Venezuela and Ukraine; and high inflation leading to price competitiveness losses weighing on corporate investment such as Brazil, South Africa and India.
“Growth has been partly driven by high credit growth to the private sector in the bulk of large emerging countries. The household debt in South Africa, Korea, Malaysia and Thailand is now comparatively high, and in China and Brazil to a lesser extent. If both infrastructure weaknesses and high private sector debt are combined, inflation tends to be comparatively high, making it difficult for the central bank to loosen its monetary policy even if activity slows, such as in Brazil, South Africa, Turkey, India and Indonesia,” the insurer warned.
Regional outlooks according to Coface
Growth will remain dynamic in emerging Asia in 2014 (expected at 6.1 per cent for the region as a whole versus 6.2 per cent in 2013). Higher growth prospects in advanced economies are positive for emerging Asian export-oriented economies, such as lower exchange rates resulting from portfolio outflows in the second half of 2013.
In China, despite the stabilisation in recent cyclical indicators (industrial production, retail sales, fixed asset investment), and the positive effect of brighter growth prospects in the US and the Euro zone, China’s economy is likely to slow a bit further as a result of slowing credit growth this year. This moderating credit cycle is required to correct past excesses: the overall private sector debt, including shadow banking credit, now accounts for 200 per cent of GDP, by far the highest figure among large emerging market economies.
The recovery in Western Europe will have a positive effect on the Central and Eastern Europe (CEE) economies in particular, which suffered from the recession in the Euro zone in recent years. However, Turkey’s domestic demand will be dragged down by tighter monetary policy.
The main downside risk in the region is related to political risks in Ukraine and Russia, which could have negative second-round effects on the CEE region through various channels (risks on gas exports to CEE countries from Russia, portfolio outflows).
Growth will slow for the fourth year in a row in Latin America. Colombia and Peru will continue to enjoy strong growth levels. Growth will rebound in Mexico due to the accelerating activity in the US, its main trading partner, along with a more favourable fiscal policy. Growth will continue to slow in Brazil on the back of the lagged effects of the monetary policy tightening. Growth prospects are even lower in Argentina and Venezuela due to high inflation caused by past loose monetary and fiscal policies.
The US, the UK and Japan
Growth will be dynamic in the US in 2014, climbing to 2.7 per cent (versus 1.9 per cent last year). The risks related to the public debt ceiling have abated, as the debt limit has been suspended until March 2015.
As in 2013, UK growth will be driven by household consumption along with housing investment. Activity should soften marginally in Japan on the back of the tighter fiscal policy.
Growth is positive in the bulk of Euro zone countries, including Germany, France, Italy and Spain. Greece is still in recession, but its magnitude has abated significantly. Coface forecasts that Euro zone GDP growth will stand at one per cent in 2014 (versus -0.4 per cent in 2013) – a positive but weak number by historical standards. Germany is expected to lead the way (+1.7 per cent expected this year).
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