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FLASH ECONOMICS ECONOMIC RESEARCH Summary

Core Content Overview

This report from FLASH ECONOMICS ECONOMIC RESEARCH dated 26 September 2014 provides an analysis of the global economic outlook, focusing on growth trends, inflation dynamics, and monetary policy implications across major regions. It highlights the uneven recovery of the G7 economies, the challenges facing the Euro zone, the vulnerability of Central and Eastern Europe, and the mixed growth prospects in the Middle East and North Africa and Latin America. It also addresses the structural slowdown in Emerging Asia, particularly in China, and discusses the potential for global inflation to remain low in the medium term.

Main Regions and Growth Outlook

G7: Growth is Returning, But Divergent

• United States and UK: Growth is returning in economies where balance sheet adjustments have made progress. The US and UK are expected to see modest growth (2.0% in 2014 and 2.7% in 2015), driven by loose monetary conditions and fiscal easing.
• Japan: Aggressive monetary and fiscal policies have led to significant volatility in growth, with a sharp drop in GDP after the VAT increase. Despite some fiscal stimulus, the economy remains weak with high public debt and an aging population.
• Europe (France, Italy, Germany): Growth is sluggish, with France and Italy lagging behind. Italy is even entering recession again. Germany faces challenges from the Russian crisis and weak productivity growth.
• Growth Outlook: The G7 is expected to grow at 2.0% in 2015, slightly better than 2014 but still below pre-crisis levels. Inflation is expected to remain around 2%, with Japan's second VAT hike likely to slow it further.

Euro Zone: Persistent Weakness

• ECB's Deflation Fight: The ECB has not yet succeeded in fighting deflation. Without deleveraging, the Euro zone is expected to experience persistently weak growth.
• Structural Reforms: France and Italy are beginning structural reforms, but these may hinder growth in the short term.
• Growth Outlook: The Euro zone is projected to grow at 1.1% in 2015, up from 0.8% in 2014. A slight rebound in global demand and euro depreciation could support exports and growth, but risks remain due to geopolitical tensions and weak domestic demand.

Central and Eastern Europe: Growth Dependent on Euro Zone and Sanctions

• Growth Drivers: Larger domestic economies, closer and high-value-added trade with the Euro zone, and smaller trade relationships with Russia are key factors in growth resilience.
• Vulnerability: The Baltic countries (Latvia, Lithuania) are particularly vulnerable due to high dependence on Russian energy and trade.
• Growth Outlook: The region is expected to grow at 2.9% in 2015, up from 2.0% in 2014, assuming the Euro zone recovers and Russia's crisis does not severely impact the region.

Middle East and North Africa: Mixed Growth Prospects

• Stable Countries: Morocco, Algeria, Saudi Arabia, and the Emirates are the most stable, with growth expected to accelerate in 2015.
• Tensions and Conflicts: Other countries in the region (e.g., Tunisia, Libya, Lebanon) face slower growth due to ongoing domestic tensions and exposure to regional conflicts.
• Economic Policies: Focus remains on stimulating consumption and investment through wage increases, subsidies, and infrastructure development.

Latin America: Structural Weaknesses and Commodity Dependence

• Commodity Dependence: Commodity prices are no longer a growth driver, and structural weaknesses persist.
• Performance: Chile and Peru show sluggish growth, Brazil stagnates, and Argentina and Venezuela face recession. Colombia and Mexico are expected to benefit from domestic demand and US recovery, respectively.
• Growth Outlook: The region is expected to continue with weak growth, influenced by falling commodity prices and weak competitiveness.

Emerging Asia: Growth Stability with Risks in China

• Stable Growth: Most countries in the region are expected to maintain stable growth in 2015.
• China's Risk: The largest risk of a slowdown is in China, where political focus is on structural reforms. This may affect the transition from an investment-driven to a consumption-driven growth model.
• Growth Outlook: Emerging Asia is expected to see continued growth, though China's performance will be critical.

Global Growth and Inflation Trends

• Global Growth: Global growth was stagnant in the first half of 2014, with a revised forecast of 3.0% for 2014 and 3.4% for 2015.
• Inflation: Global inflation remained stable in 2014 at 2.6%, with expectations of a slight decline to 2.5% in 2015.
• Drivers of Inflation: In the developed world, inflation is supported by loose monetary conditions and fiscal easing, while in emerging economies, it is driven by currency depreciation and falling food prices.
• Long-term Inflation: Structural factors such as improved energy efficiency and falling prices of manufactured goods are expected to keep inflation low for a long time.

Liquidity and Monetary Policy

• Global Liquidity: The global monetary base is expected to continue growing in 2015, despite the Fed's potential slowdown in balance sheet expansion.
• Monetary Policy Impact: The ECB's new monetary programs (TLTROs, ABS purchases) and Japan's potential fiscal stimulus will support liquidity.
• Interest Rates: The Fed is expected to start raising interest rates in mid-2015, which may dampen the impact of monetary stimulus on long-term interest rates.
• Risks of Tightening: Premature tightening by central banks could be costly for the real economy, leading to poor resource allocation and weakened growth.

Key Risks and Outlook

• Downside Risks: The Russian crisis is a major downside risk, affecting European business sentiment and trade.
• Political Uncertainties: In the UK, political uncertainties (e.g., Scottish referendum, Brexit) could hinder growth and inflation control.
• Global Trade: Leading indicators suggest a slowdown in global trade, though the second half of 2014 may see a slight rebound.
• Consensus vs. Natixis Forecast: Natixis is less optimistic than the consensus about global trade growth, expecting 4.5% in 2015 compared to 4.4% from others.

Conclusion

The global economy is experiencing a slow and uneven recovery, with developed economies showing some signs of improvement but still facing significant risks. Emerging economies are struggling with structural issues and external shocks. While inflation is expected to remain low, the end of accommodative monetary policies may have long-term consequences for growth and stability. The report emphasizes the importance of structural reforms, energy security, and geopolitical stability in shaping future economic outcomes.