The outlook for economic growth is gradually improving in most parts of the world, led by evidence of a more sustainable recovery in the US, according to The Economist Intelligence Unit’s Global Forecasting Service.
Despite considerable risks, including potential political crises, many investors, businesses and consumers are showing signs of rising confidence and the outlook is set to improve further from mid-2013.
The economic recovery in the US remains on track despite a slight contraction in GDP in the fourth quarter.
One-off factors, including a large decline in defence spending and inventory adjustments by businesses held back growth, but overall spending by consumers and companies was relatively strong. The US jobs market is also strengthening, and the housing market continues to rebound.
A potential political showdown in the US over the government's borrowing authority—the so-called debt ceiling—was delayed for at least several months following a deal by lawmakers. But a second political crisis, over a series of large spending cuts, could begin on March 1st.
The Economist Intelligence Unit expects a deal here as well, but not before some of the cuts take effect. In the absence of a deal of any kind, the spending cuts would damage the economy and we would lower our GDP growth forecast for 2013.
Euro strength will be capped
The EIU has adjusted its 2013 US dollar:euro exchange-rate forecast to US$1.33:€1 from US$1.31:€1. The euro has strengthened as the debt crisis in the currency zone has eased and as global risk tolerance has increased, leading some investors to sell the safe-haven dollar.
The euro has also risen as banks in the region pay back loans provided last year by the European Central Bank.
The euro's strength will, however, be capped by continuing weakness in euro zone economies and stronger growth in the US.
"We expect Japan's yen to be substantially weaker in 2013 and over the next several years as the central bank further eases monetary policy and targets a higher rate of inflation to stimulate economic growth. We have lifted our 2013 yen:US dollar exchange rate to an average of ¥92.8:US$1 from ¥88:US$1, rising to ¥98:US$1 in 2016," says The Economist Intelligence Unit.