November 5th, 2014
from the Dallas Fed
World output growth inched up to 3.1 percent year over year in the second quarter because of a pickup in emerging market economies. In October, the International Monetary Fund (IMF) revised its April forecast of global output growth downward from 3.4 percent to 3 percent for the second half of 2014 on the heels of disappointing growth in the euro area.
There are also widening disparities in growth among advanced and emerging economies. Output growth in 2014 in the U.S. and the U.K. is expected to be strong at 2.2 percent and 3.2 percent, respectively, according to IMF forecasts; however, growth in Germany, France and Italy is expected to be a paltry 1.4 percent, 0.4 percent and –0.2 percent, respectively. Growth in emerging markets is similarly uneven.
Inflation in advanced economies is low at 1.7 percent year over year in August, and inflation in emerging markets has been relatively stable around 5.3 percent. Depressed prices in advanced economies show that countries are not operating at their full potential (Chart 1). There have been no major changes in monetary policy.
Sustained global economic recovery is mostly threatened by waning growth and very low inflation in the euro area. In emerging markets, large fluctuations in commodities prices have had diametrically opposing effects, although growth in China has remained stable.
Worrisome Growth and Inflation in the Euro Area
GDP growth in the euro area is expected to stay flat at 0.8 percent year over year due to sluggish growth in its largest economies, according to IMF forecasts (Chart 2). Inflation is very low at 0.3 percent in the 12 months leading up to September, and there is risk of the area slipping into deflation.
In Germany, industrial production was down by 4 percent in August, well below the market’s expected 1.5 percent decline. German industrial production is strongly correlated with GDP and inflation in Germany. Low growth in Germany and other euro-area member states could indicate even lower prices and wages, especially in the periphery. Seven countries in the euro area are already in deflationary territory (Chart 3).
Deflation is particularly risky because of the significant debt euro-area countries hold. It means that consumers and businesses are likely to delay spending and investing as they expect prices to fall in the future. This could also contribute to more defaults on loans in the region. Low commodity prices over the last few months, especially for oil and natural gas, have been a contributor to low inflation. If commodities prices stay depressed, this could be a short-term boon to businesses and consumers.
The European Central Bank (ECB) announced that it would start buying covered bonds and asset-backed securities as well as increase loans to banks to reduce risks of deflation in the region.
Results for asset-quality review and forward-looking stress tests of the euro-zone banks released on Oct. 26 identified a capital shortfall of €25 billion at 25 banks—most of which are in Italy and Greece—as of Dec. 31, 2013. Twelve of the 25 banks have already covered their capital shortfall by increasing their capital in 2014, and the remaining banks will have up to nine months to cover the shortfall.
China’s Growth Near Target
GDP growth in China was down to 7.3 percent year over year in the third quarter—its lowest value since first quarter 2009. Still the third-quarter number was close to the Chinese government’s target of 7.5 percent growth in 2014. Growth in home prices has steadily declined in China since the beginning of 2014, a welcome change from inflated levels in 2013 (Chart 4). In September, growth of total bank lending in the country declined by 1.1 percentage points year over year, as a result of a substantial drop in loan demand, nontraditional bank lending and an increase in short-term corporate loans.
Falling Energy Prices Affect Emerging Market Economies
Commodities prices have been declining since the end of the second quarter (Chart 5). Energy prices in particular have fallen by over 20 percent since July. This has resulted from an increase in supply and weakening demand. Oil supply has increased because Libya and Saudi Arabia expanded production in September compared with August and hedge-fund investors sold their oil reserves. The International Energy Agency cut its forecasts for demand for the fourth consecutive time in the third quarter. Venezuela, whose economy is heavily dependent on oil revenues, nearly defaulted in the third quarter. Iran, which is similarly reliant on oil and gas revenues, was also gravely affected. In contrast, countries such as India and Indonesia, with large fuel subsidies, have benefitted from the drop in prices.
- Data reported in this international update for the aggregates—world (ex. U.S.), advanced (ex. U.S.) and emerging—come from a representative sample of 40 of the largest economies ranked by their importance as trading partners of the U.S. (G–40). See “Database of Global Economic Indicators (DGEI): A Methodological Note,” by Valerie Grossman, Adrienne Mack and Enrique Martínez-García, Federal Reserve Bank of Dallas, Globalization and Monetary Policy Institute Working Paper no. 166, December 2013.
About the Author
Parasrampuria is a research assistant in the Globalization and Monetary Policy Institute at the Federal Reserve Bank of Dallas.