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International Economic Update

Financial Risks Ease, but Effects May Be Slow to Reach Global Economy

February 6, 2013 · Update in PDF PDF

Growth in the U.S., decreased uncertainty in the euro area and better-than-expected growth in China have contributed to a more stable outlook for global growth in 2013. Emerging economies are delivering tempered but solid growth, and the U.S. stands out as one of the strongest of the advanced economies. The euro-area crisis remains the most pressing risk to the global economy, but talks in the region have partially renewed investor confidence.

Real Economic Conditions Soft but Stable

International Monetary Fund (IMF) chief economist Olivier Blanchard said that “cautious optimism” may be warranted for the global economic outlook because “acute risks” have decreased. In January, the IMF forecast 2013 global gross domestic product (GDP) growth of 3.5 percent, higher than the 3.2 percent posted in 2012. Expectations are for global growth of 4.1 percent in 2014 (Chart 1).

Monthly Consensus Forecasts of 2013 real GDP growth for emerging economies were mostly unchanged throughout 2012 and showed these economies continuing to bolster world GDP growth. Expectations of 2013 growth for advanced economies remained stable for the first half of 2012 and then declined slightly the rest of the year for most countries. The declines seem to have leveled off in January for most advanced economies, improving in the U.S. and Japan (Chart 2). In spite of a fourth-quarter decrease in U.S. GDP (according to first estimates), growth remains steady at an annual rate of 2.2 percent in 2012, ahead of the 1.8 percent reading of 2011.

Industrial production data show that global output ticked up in November, with advanced economies still posting a negative year-over-year industrial production growth rate. The U.S., however, is in positive territory, and it grew at a faster year-over-year rate in November than in October. Emerging economies continue to lead industrial production growth (Chart 3).

Global purchasing managers indexes (PMIs) indicate that the manufacturing sector left contractionary territory in December, coming in at 50.2. The global composite index, which includes manufacturing and services, continued its upward trajectory at 53.7.

Concerns about a slowdown in China have lessened on improved manufacturing activity in the country. The Chinese PMI “flash” estimate released by the British bank HSBC increased to 51.9 in January from 51.5 in December. This was the fifth straight increase in the index, bringing it to its highest level in two years. The IMF forecasts 2013 Chinese GDP growth of 8.2 percent, up from 7.8 percent in 2012.

Policy Rates Little Changed; Central Banks Expand Programs

Inflation is expected to remain stable in both advanced and emerging economies, leaving central banks to focus on growth instead (Chart 4). On Jan. 29, the Reserve Bank of India cut its policy rate by 0.25 percent to 7.75 percent and also lowered banks’ reserve requirements to 4 percent due to slowing inflation and waning GDP growth. Some emerging economies are starting to loosen monetary policy, but most central banks in advanced economies have left monetary policy rates unchanged. Seeking other ways to boost growth, many central banks in advanced economies have recently enacted aggressive quantitative easing programs. On Jan. 22, the Bank of Japan was the latest when it agreed to double its inflation target to 2 percent and announced an open-ended asset purchase program. The landslide victory of Japanese Prime Minister Shinzo Abe has also created expectations of more aggressive stimulus to weaken the yen in order to combat Japan’s deflationary problems and increase its exports.

Risks to the Outlook

With a partial agreement on the U.S. fiscal cliff mitigating the risks of an abrupt shift in fiscal policy, the euro-area crisis remains the most pressing risk to the U.S. and global economies. The U.S. has many ties to Europe and is exposed to the effects of the crisis. One of the direct channels through which the U.S. is exposed is through its exports to the region (Chart 5). Three European countries are among the top 10 destinations for U.S. exports. A slowdown in growth or demand in these countries, therefore, has immediate consequences for U.S. growth.

Financial risks appear to have been tempered during the last part of 2012, but growth in the euro area is still projected to be negative. The January Consensus Forecasts predicted a –0.4 percent year-over-year real GDP growth rate for 2012. The forecast for 2013 comes in slightly higher at –0.1 percent. While conditions in the euro area seem to be improving, the transmission of improved financial conditions to the real economy may be delayed, partly because of uncertainty about the resolution of the sovereign debt and banking crises in some peripheral euro-area countries.

Germany—the economic pillar in the euro area—recently lost steam as GDP contracted in fourth quarter 2012. The Bundesbank lowered its 2013 growth forecast to 0.4 percent on Dec. 7 but said in its January report that there are signs of recovery in first quarter 2013. The report cited a relatively strong labor market and improved expectations for output and exports.

While Germany shows more recent signs of improvement, other countries in the euro area are still feeling the effects of the recession. Across the euro area, the unemployment rate increased to 11.8 percent in November. Spain’s rate rose to 26 percent, a record high, in fourth quarter 2012. The IMF also lowered Spain’s 2013 GDP growth forecast to –1.5 percent as the nation continues austerity measures to reduce its budget deficit to 4.5 percent of GDP. However, Spain is among the euro nations benefiting from renewed investor interest in their government bonds (Chart 6).

This relative calm in the financial markets comes after the European Central Bank (ECB) promised—in the words of its president Mario Draghi—to do “whatever it takes” to defend the euro. European finance ministers agreed on a banking union in December that gives the ECB direct supervision over euro-area banks that have more than €30 billion ($39 billion) in assets. The aim behind the deal is to enact reforms to deepen the policy framework of the monetary union. The hope is that it will also rebuild investor confidence and get liquidity to flow into the real economy.

—Valerie Grossman

About the Author

Grossman is a research assistant in the Globalization and Monetary Policy Institute at the Federal Reserve Bank of Dallas.


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