World GDP growth is set to recover (+2.9% in 2014) but the pace of the recovery remains slow (below 3% for the third year in a row) and downside risks prevail. According to Euler Hermes’ latest global economic outlook, advanced economies are picking up speed with an expected growth of +2.0% in 2014, the fastest since 2010.
The UK (+2.4%) and eurozone members (+1.0%) continue to improve, while the U.S. (+2.8%) was slightly held back by an extremely severe winter. Abenomics still creates steady growth in Japan (+1.2%), though more efforts are needed to keep the engine running. Emerging economies remain the primary contributors to global growth (+4.3% in 2014), but expectations have dampened following the sharp revision of Russia’s growth prospects as well as slowing growth outlooks for Brazil, South Africa and Turkey.
Has the game changed?
Of the “10 Game Changers for 2014 Global Growth” introduced earlier this year, three have since become pivotal: disinflation in the advanced economies; the fragility of the emerging economies, and old and new (geo-)political risk in 2014, especially in the emerging economies.
As emphasised by Euler Hermes late last year, the ability of emerging economies to weather financial tensions largely depends on their financial fundamentals. National authorities need to be responsive and flexible in creating compensating policies.
At the beginning of 2014, Euler Hermes classified emerging countries against two criteria: their fragility related to the U.S.’s quantitative easing ( QE) tapering, and their dependency on exports to China, i.e., countries that could be hit by a slowdown in China’s GDP growth and the transformation of its economic model.
The resulting list of 10 most vulnerable countries in the short-term, the ‘Fragile 10’ , includes Argentina, Brazil, Chile, Colombia, India, Indonesia, Mexico, the Philippines, South Africa and Turkey.
Since then, the quality of economic policy and authorities’ responsiveness to the QE tapering program and rising (geo)-political risks in recent months reveal that some countries are in better shape to weather storms than others. They constitute the ‘Improving 4’ (Chile, Colombia, Mexico and the Philippines), the ‘Precarious 5’ (Brazil, India, Indonesia, South Africa and Turkey) and Argentina.
The way ahead – who is hot, who is bright?
The new Euler Hermes global economic report has identified a range of hot spots, soft spots and bright spots that are likely to impact global confidence in the short-term:
Political Hot Spots: Russia, Ukraine and, to a lesser extent, Turkey remain political hot spots due to (geo)-political risks weighing on their economies and potentially creating negative spillover effects.
Economic Soft Spots: Brazil, South Africa and, to a lesser extent, India are economic soft spots, having to adjust to a world where emerging markets are no longer investors’ darlings purely by definition. Also in this group are France, which needs to rethink its business model, and Germany, which could be challenged by prevailing eurozone deflationary pressures as well as the strong euro.
Confidence Bright Spots: The U.S. and the UK are confidence bright spots, as growth has gained traction. Southern Europe shows signs of improving economic prospects and confidence after several years of painful adjustments and austerity. China is also a member of the group despite challenges related to the changed business model, as there are positive signs of a successful transition.