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Slaughter & Rees Report - Green Shoots in Springtime

April 14, 2014 --

Here in Hanover and in much of the northern hemisphere, winter is finally releasing its icy grip. Springtime brings birds migrating back north (not, of course, the African swallow). Springtime brings the world’s most beautiful golf tournament, The Masters, with another green jacket awarded yesterday evening. And, springtime brings the spring meetings of the International Monetary Fund and the World Bank Group—plus the always interesting IMF annual, The World Economic Outlook. This latest WEO offers a few hopeful spring signs for green shoots in the global economy.

One green shoot is simply the sheer size of today’s global economy. Quick Monday morning quiz: what was global gross domestic product (GDP) last year? That’s right: just a tad under $74 trillion, the WEO estimates. From 2012 to 2013, global GDP rose by about $2 trillion. These immense numbers show the potential value to any company of global engagement. For example, last year the U.S. economy accounted for only about 25 percent of this worldwide GDP growth. Wherever your company calls home, the potential markets beyond your border are likely very large and/or growing much more than growth at home.

A second green shoot is the forecast of continued economic recovery post-financial crisis. Thus does this latest WEO open, “The dynamics that were emerging [last year] are becoming more visible: The recovery then starting to take hold in advanced economies is becoming broader.” Growth in global GDP is forecast to accelerate slightly, from 3.0 percent in 2013 to 3.6 percent in 2014. Much of this acceleration is seen as coming from advanced economies, with a growth pick-up from 1.3 percent to 2.2 percent. Even the fragile Euro Area, whose GDP shrank in both 2012 and 2013, is forecast to grow by 1.2 percent.

And a third green shoot is the view that some downside risks to the global economy have abated. Scanning the world overall, the WEO concludes that, “The balance of risks to WEO projections for global growth has improved.” For example, its modeling of possible scenarios now finds that the probability of global growth falling below 2 percent has fallen from 6 percent last year to just 0.1 percent now. Part of what drives this reduced downside risk is the continued historically aggressive monetary policy of the world’s most important central banks.

Of course, all forecasts should be read with appropriate circumspection. And when pondering the global economy, risks still lurk even amidst green shoots. Thus the title of this WEO: “Growth Strengthens, Remains Uneven.” In many emerging markets, there are clear risks of slowing economic growth and/or financial instability. Last week China announced that its exports and imports both fell year-over-year in March, and Premier Li Keqiang hinted at the annual Boao Forum that China’s 2014 GDP growth might fall below its official 7.5 percent target.

Perhaps the world’s most prominent risk is the specter of deflation in advanced markets: that is, of the level of prices of goods and services falling rather than rising. In the Euro Area price inflation has recently decelerated to rates below 1 percent. In Japan a central goal of “Abenomics” is to end its years of deflation; some measures of Japan’s inflation have recently turned positive, but sustained inflation remains uncertain. And even in the United States, Federal Reserve officials have joined other central banks in worrying how low inflation is as one of the Fed’s preferred price measures, which covers personal consumption expenditures, rose just 0.9 percent year-over-year in February. Deflation tends to smother economic growth by inducing households and companies alike to postpone activity. Thus did IMF chief economist Olivier Blanchard say at last week’s meetings that, “We think there is a risk of deflation, negative inflation … We think that everything should be done to try to avoid it.”

Spring often brings hope for renewal. Here in 2014, the global economy carries such hope—more so than in many years. Cross fingers that policy leaders are up to the task of helping transform this hope into reality.

Articles © 2014 Matthew Slaughter and Matthew Rees. All rights reserved.
Publication © 2014 Trustees of Dartmouth College. All rights reserved.

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