Neil MacKinnon of VTB Capital -
The latest economic forecasts from the World Bank show that five years after the financial crisis, the global economy is demonstrating signs of bouncing back this year, as the advanced economies are "turning the corner". The World Bank, along with the IMF and OECD, are the main providers of global economic forecasts and so their assessment and projections provide an important guide for the financial markets. For this year, 2014, the World Bank expects real GDP growth for the global economy to expand 3.2% (from 2.4% in 2013) which is coincidentally in line with our own long-standing forecast. In 2015, GDP growth is expected to rise by 3.4%.
The World Bank notes that growth prospects for 2014 are sensitive to the tapering of monetary stimulus in the US, which the Federal Reserve started in December 2013. In addition, there is a sensitivity to the structural shifts taking place in China's economy.
The World Bank forecasts that growth in developing economies will pick up from 4.8% in 2013 to a slower than previously expected 5.3% this year and then by 5.5% in 2015. The pace is about 2.2pp lower than during the boom period of 2003-2007, but the World Bank feels that the slower growth is not a cause for concern: almost all of the difference reflects a cooling off of the unsustainable "turbo-charged" pre-crisis growth. However, even this slower growth represents a substantial (60%) improvement compared with growth in the 1980s and 1990s.
For high-income countries, the drag on growth from fiscal consolidation will continue to ease, resulting in an eventual stabilisation of GDP growth of 2.4% in 2015 and 2016. Among the high-income countries, the recovery is expected to be most advanced in the US, with GDP expanding by 2.8% in 2014 after 1.3% in 2013. Elsewhere, after two years of contraction, the Eurozone recovers by 1.1% this year (close to the European Commission's own forecast), but GDP growth is not expected to be any greater than 1.5% by 2016. Growth levels that are this soft will do little to stem the escalation in government debt/GDP ratios, which exceed 100% in many of the Eurozone economies.
On a regional basis, the World Bank sees growth in East Asia and the Pacific as being vulnerable to risk of a disorderly unwinding of Chinese investments, abrupt tightening in global financing conditions and lower commodity prices. Chinese GDP growth is projected to stay flat at 7.7% in 2014, slowing to 7.5% for the next two years, which is similar to our own prognosis, and this reflects the impact of debt deleveraging and less reliance on policy-induced investment. We also note the challenge for the Chinese authorities in managing the surge in credit, as highlighted by this morning's latest money supply data, which shows that Total Social Financing (the broadest measure of credit expansion) is still elevated, at RMB 1.2tn. Periodic squeezes on the Chinese short-term money market rates in order to restrain liquidity look likely. Growth in the East Asia and Pacific region eased for a third year in 2013, to 7.2%, with growth slower in Indonesia, Thailand and Malaysia.
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