The US and China will add nearly US$800 billion to global growth this year. However this growth is being held back by emerging markets, according to the latest Global Outlook Report from The Economist Intelligence Unit (EIU).
So far in 2014, global financial markets have been volatile. The principal cause of problems has been the continuing domestic trouble in emerging economies with poor policy and subsequent political turmoil being seen in Turkey, Ukraine, Thailand and South Africa. However with key markets, such as the USA, continuing to deliver strong economic growth; there has been no widespread financial rout.
“The US economy, as we have said repeatedly, is not on the verge of a sharp acceleration in growth, but conditions are clearly improving as the pick-up spreads beyond manufacturing and housing - the early drivers of the recovery - to consumer spending and business investment," says Simon Baptist, Chief Economist at The Economist Intelligence Unit. "We are therefore raising our 2014 forecast for US economic growth to 3% from 2.6%.”
Potential crisis in emerging economies
Many of the worst-hit emerging markets are suffering from varying levels of political instability that are breeding an investor backlash of their own. Jittery investors have been over-reacting to any negative news in emerging markets.
Argentina's decision to allow the peso to fall in value by 15% in a two-day period in January was one such trigger, another being that Turkey is in the midst of a serious political crisis that threatens to destabilise the government.
However more notable targets have also been susceptible. Brazil, India and Indonesia have all been vulnerably exposed to the dangers of having large current-account and fiscal deficits. Exacerbating this further is the fact that Brazil, India and Indonesia as well as Turkey and South Africa all have important elections taking place this year.
Despite apparent weakness in emerging economies and global growth likely to be well below the peak of 5.2% in 2007, 2014 should mark an important step in the recovery of the advanced economies from the recession and the other shocks that have stunted global growth in recent years.
US growth set to extend
The EIU is raising its 2014 forecast for US economic growth to 3% from 2.6%. US real GDP expanded by an impressive 3.7% (at an annual rate) in the second half of 2013. The US trade performance has been encouraging, as exports have been robust and imports of oil have been falling as the US shale energy revolution boosts domestic production.
“There remains a lingering fear that the US economic recovery may not last. However the difference this time is that most of the fundamentals that support growth — job creation, reduced debt, consumer spending, business investment, housing and general government outlays—are all, collectively, contributing to growth, a situation that did not exist during past, aborted recoveries,” continued Baptist.
Looking to Asia, it is now clear that debt in China has been rising at a rapid rate for some time. At the same time, the central bank has been trying to reduce liquidity in the banking system to curb excessive lending. Despite this the EIU still expects to see a rate of 7.2% for 2014 real GDP growth.