Global Outlook Decline Driven by US and Japan

The outlook for the global economy in 2014 grew worse this month. The deterioration in the outlook for the United States and Japan more than offset the improvement for the United Kingdom. FocusEconomics panelists expect the global economy to expand 3.2% in 2014, which is down 0.1 percentage points from last month’s projection. Next year, panelists see the global economy picking up the pace and expanding 3.5% in 2015, which is unchanged from last month’s forecast.

Photo by Simon Daniel Photography

Photo by Simon Daniel Photography

Cloudy Economic Outlook for United States

In the United States, recent indicator releases showed mixed signals for the economy. According to an updated release, GDP expanded at a seasonally adjusted annualized rate (SAAR) of 2.4% in Q4 (previously reported: +3.2% quarter-on-quarter SAAR). The result marked a deceleration over the 4.1% growth recorded in Q3. More recent data point to an ongoing struggle for the economy, which hit a soft patch at the beginning of the year largely due to the impact of harsh weather conditions. While growth in payrolls accelerated by less than expected in January, the unemployment rate still dropped to 6.6%. Retail sales were driven down by the cold weather in January and consumer confidence deteriorated in February.

On a positive note, the ISM manufacturing index rebounded from the 51.3 recorded in January (the lowest reading since May 2013) to 53.2 in February. Despite the improvement, manufacturing sentiment is still below the 57.0 peak recorded in November. Against this backdrop, FocusEconomics panelists expect the U.S. economy to expand 2.8% in 2014, which is down 0.1 percentage points over last month’s projection. The panel expects the economy to grow 3.0% in 2015, which is unchanged compared to last month.

Recovery in the Euro area gains momentum, but weaknesses persist

Indicator releases in the Euro area point to a continued improvement, although weaknesses persist. According to a preliminary release, GDP expanded a seasonally-adjusted 0.3% over the previous quarter in Q4 2013. The reading marked an acceleration over the 0.1% growth in Q3 and marked a third consecutive period of expanding economic activity. That said, industrial production 0.7% contracted in December, contrasting the 1.6% rise recorded in November. At the same time, unemployment remains worryingly high; in January, unemployment was unchanged at 12.0% for a third consecutive month. Survey-based indicators provided mixed signals. While the economic sentiment indicator released by the European Commission picked up from 101.0 in January to 101.2 points in February, the Markit Manufacturing Purchasing Managers’ Index (PMI) slowed from a 32-month high of 54.0 in January to 53.0.

Political events took center stage this month amid the recent change of power in Italy where former Mayor of Florence Matteo Renzi took over ex-premier Enrico Letta to become the third Italian premier in a row to take office without winning a parliamentary election. Taking into account the slight overall improvement in the Euro area, FocusEconomics Consensus Forecast panelists expect the region’s economy to expand 1.0% in 2014, which is unchanged over last month’s forecast. Panelists also maintained their projection of a 1.4% expansion for 2015.

In Japan, the debate regarding the consequences of a weak yen has dominated the headlines in recent weeks, particularly after Q4 GDP data showed that the external sector still represents a drag on economic activity. In addition, the trade balance recorded its largest deficit on record in January, mainly due to soaring imports. Japanese companies shifting of production abroad and soaring energy imports are taking a toll on the country’s trade balance. These developments have raised concerns among analysts that the impact of Abenomics is increasingly losing steam.

Many warn that Japan’s economic recovery could be derailed when the sales tax increase that is looming on the April horizon takes effect. Thus, pressure on both the government and the Bank of Japan to take additional action in the coming months is mounting. FocusEconomics panelists expect Japan to grow 1.5% next year, which is down 0.1 percentage points from last month’s projection and marks the second downward revision to the country’s outlook in the last three months. For 2015, panelists expect the Japanese economy to expand 1.3%, which is unchanged from last month’s forecast.

Outlook for BRIC Countries Unchanged Despite Escalating Russia-Ukraine Turmoil

FocusEconomics panelists kept their 2014 GDP projections for the BRIC countries unchanged this month. That said, recent turmoil in emerging markets took a toll on some of the BRIC economies, in particular Russia, where the outlook was revised down by 0.1 percentage points. Recent tensions with bordering Ukraine, which had a depressing impact on the markets and prompted a further drop of the ruble, may also have a sizable impact on the Russian economy this year. Within this setting the panel did not change its projection over last month’s forecast of 5.9% growth in 2014. In 2015, the BRIC economies are expected to expand 6.0%, which is down 0.1 percentage points from last month’s estimate.

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Outlook for 2014 & 2015 Global Inflation Stable

Regarding global price developments, panelists’ global inflation expectations did not change as downward revisions to the United Kingdom and the Euro area were offset by an upward revision for the BRIC economies. FocusEconomics Consensus Forecast panelists’ projection for 2014 global inflation was unchanged compared to last month; they expect inflation to reach 2.9% in 2014. For 2015, panelists see inflation at 3.0%, which is also in line with last month’s forecast.

 Note: This is an excerpt from the FocusEconomics Consensus Forecast Major Economies – March 2014, published March  4th, 2014. The full report (123 pages, covering the G7 economies and the Eurozone plus an overview of the BRIC economies (Brazil, Russia, India and China) is available for immediate download at the FocusEconomics Online Store). For more information and a free sample of the report please visit our website.

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