Growth forecast cut by OECD

July 2014  |  FEATURE  |  ECONOMIC CONDITIONS

Financier Worldwide Magazine

July 2014 Issue

July 2014 Issue


According to the Organisation for Economic Cooperation and Development (OECD), the global economy will grow by less than expected in 2014 due to slowed growth across the emerging markets.

Emerging market economies will endure difficulties for the remainder of 2014, says the OECD, thanks in part to tightening financial and credit controls around the world, as well as policy-tightening in developed nations. The organisation has also warned that high levels of unemployment across the globe will continue to hinder economic growth. According to the report, 11.25 million more people will be out of a job at the end of 2015 than at the onset of the global crisis.

The OECD also believes that, increasingly, emerging market economies such as China and Russia are becoming a drag on the global economy. Although the OECD notes that the slowing of the emerging markets will have a negative effect on growth, it is unlikely it will serve to derail the global economic recovery.

According to its latest Economic Outlook, the think tank now believes the global economy, particularly in emerging markets, will see only “moderate” economic and trade expansion this year. In the short term, economic expansion will be predicated on growth in the US and the eurozone. Growth across the OECD’s 34 member countries is expected to come in at 2.2 percent in 2014 and 2.8 percent the following year. The wider global economy will now expand by 3.4 percent in 2014 instead of the 3.6 percent predicted by the OECD in November 2013. However, the organisation, which is based in Paris, maintains that the global economy will expand by 3.9 percent in 2015 as it had previously predicted. “Part of this deceleration is benign, reflecting cyclical slowdowns from overheated starting positions,” said the OECD’s chief economist Rintaro Tamaki. “However, managing the credit slowdown and the risks that built up during the period of easy global monetary conditions could be a major challenge.”

Emerging market economies such as China and Russia are becoming a drag on the global economy.

In its semi annual growth report, the OECD also cut its growth predictions for China in 2014. China will grow 7.4 percent this year as opposed to the previous projection of 8.2 percent. The organisation believes that expansion across China has slowed as a result of concerted efforts to rein in lending. The OECD also noted that the People’s Bank of China should be prepared to ease monetary policy in the event that the national economy slows sharply.

Predicted growth in the US is also down. The US economy is forecast to grow by 2.6 percent in 2014, down from November’s 2.9 percent estimate. The unusually frigid weather which gripped America in December and January has been cited as a major cause of the forecast downgrade, as has the government shutdown in October 2013. Yet, despite the low levels of growth predicted for the first quarter, growth in the US is expected to rebound strongly throughout the remainder of 2014. The OECD forecasts 3.9 percent growth in the second quarter as the economy begins to recover from the lacklustre winter. Similarly, strong growth is forecast for the third and fourth quarters of 2014, at 3.5 percent and 3.4 percent respectively. In 2015 the OECD believes that US economic output will continue to expand by around 3.5 percent.

Although the recovery is more noticeable among the world’s most advanced economies, conditions also are improving steadily in the eurozone. The organisation has predicted growth in Europe of 1.2 percent in 2014, following a prolonged period of economic contraction. Unemployment within the eurozone is, however, likely to remain high. Equally, low inflation will remain an issue. As a result, the OECD has recommended that Europe keeps interest rates low or considers lowering them further.

In the UK, the OECD has predicted growth of 3.2 percent for 2014, up from its forecast of 2.4 percent in November. The organisation has also upgraded its forecast for 2015 to 2.7 percent from 2.5 percent. This forecast upgrade was the highest of all the G7 countries. The OECD believes the UK’s nascent economic recovery has been based on an accommodating monetary policy and stronger than predicted employment growth. Economic activity in the UK is expected to be sustained by improving household spending and an upturn in investment over the next 12 months.

The Japanese economy will also expand in 2014, though not as much as originally forecast. Japan’s economy is expected to grow by 1.2 percent in both 2014 and 2015, according to the report. 2014’s growth prediction was down from November’s previous forecast of 1.5 percent. Indeed, Japan was highlighted by the OECD as the nation among developed economies which is most in need of large scale deficit reduction plans. “With gross public debt surpassing 230 percent of GDP, a detailed and credible fiscal consolidation plan remains a ‘top priority’,” said the OECD.

The overall message from the OECD is positive. However, the emerging markets still face some difficulty in the coming years. As emerging markets now account for over half of the world’s economy, continued sub-par economic performance will mean global growth remains modest in the short term.

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Richard Summerfield


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