World Economic Prospects

At the start of 2013 we took the view that the world recovery would be clearly strengthening by the end of the year, thanks to an accelerating US, a pick‐up in world trade and an upturn in emerging markets. These three factors have, however, failed to be as supportive as we had anticipated and global growth has remained patchy. Emerging markets such as India and Brazil have shown especially disappointing growth, and world trade growth has been unusually weak for the second straight year (see special focus). The inflow of data in the US and the Eurozone has also tended to disappoint relative to expectations in recent weeks, contributing to modest downgrades to near‐term forecasts in both this month. A particular concern is the sluggishness of the US consumer – real consumption rose only 1.5% annualised in Q3. There are also causes for optimism. Business morale generally seems robust in the advanced economies and growth is strong in the UK and Japan, at a more than 3% annualised rate. Recent indicators in China point to a modest upturn so we have slightly upgraded China's 2013–14 growth forecasts this month. Nevertheless, the global economy still looks some way from reaching ‘escape velocity’. Recent policy developments tend to confirm this – the ECB cut rates to 0.25% in November and we now expect no Fed ‘tapering’ of asset purchases before next March. We still expect world GDP growth to pick up from 2.1% this year to 2.8% next. But next year's growth will be well below that seen in the pre‐crisis period 2004–7. And achieving even this modest acceleration will require the avoidance of the policy ‘own goals’ which have retarded recovery this year – notably the US sequester and government shutdown, and the overcautious monetary policy of the ECB (see special focus), which risks tipping the Eurozone into a period of deflation.