Forecasts for Major Economies Remain on Downward Trajectory

The global GDP growth outlook deteriorated this month, marking the second downward revision in four months. Downward revisions for the Euro area and the United States more than offset upward revisions for Japan and the United Kingdom. FocusEconomics panelists expect the global economy to expand 3.0% 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 3.4%, which is unchanged from last month’s forecast.

Photo by matejcek

Photo by matejcek

Recent releases Point to A Pick-up in U.S. Economy After Dismal Q1 Performance

The United States’ downbeat GDP result was the main driver behind the downward revision to the country’s outlook this month. According to an advance estimate, U.S. GDP expanded at a seasonally adjusted annualized rate of 0.1% in Q1, which marked a sizable deceleration compared to the 2.6% expansion recorded in Q4. Harsh weather conditions in the first three months of the year were the likely cause of what represented the lowest result since the first quarter of 2011. FocusEconomics panelists currently expect the U.S. economy to expand 2.6% in 2014, which is down 0.2 percentage points from last month’s projection. The panel expects the economy to grow 3.0% in 2015, which is unchanged compared to last month.

More recent data suggest that the economy may be gaining back some of its momentum. In April, the ISM manufacturing index increased to 54.9%; moreover, growth in payrolls accelerated more than expected and the unemployment rate fell to the lowest level since September 2008 when the financial crisis began. On a negative note, consumer confidence deteriorated on the back of a more negative assessment of the country’s current economic conditions and retail sales decelerated following March’s rebound.

Q1 GDP Results Suggest Euro area Recovery Will Be Slower Than Expected

The downward revision to the growth outlook for the Euro area also came on the back of a Q1 GDP reading that was weaker than expected. GDP expanded a seasonally-adjusted 0.2% over the previous quarter in Q1, which was in line with the result recorded in the last quarter of 2013, but fell short of market expectations. Forward-looking indicators, however, suggest that the recovery will continue in the coming months, although weaknesses will persist. The Markit Composite PMI Output Index flash estimate ticked down from 54.0 in April to 53.9 in May. Despite May’s moderation, the composite PMI has been above the 50-point threshold that signals a stable economic outlook since July of last year, thus pointing to a continuing expansion in economic activity in the months ahead.

The flow of economic news from the Euro area was broadly positive; Portugal made its exit from the bailout official and the credit ratings for Spain and Greece were upgraded. That said, the 25 May European Parliament elections saw the rise of parties that are hostile toward or sceptical about the European Union, a development that threatens to add instability to the political scenario. Meanwhile, all eyes are on the next ECB meeting that is scheduled for 5 June at which President Mario Draghi is likely to announce a new round of monetary easing.

Taking into account these developments, FocusEconomics Consensus Forecast panelists expect the Euro area economy to expand 1.1% in 2014, which is down 0.1 percentage points over last month’s forecast. Panelists left their projection for next year’s growth unchanged at last month’s 1.5%.

Japan’s Q1 GDP Expands Strongly on Shopping Spree Prompted by April Sales Tax Hike

Unlike in the world’s two other economic behemoths, Japan saw a solid GDP showing in the first quarter. Economic activity soared at the fastest pace since Q3 2011, expanding 5.9% over the previous quarter in seasonally adjusted annualized terms. The result, which marked a strong acceleration over the meager 0.3% increase recorded at the end of last year, was propelled by robust private consumption ahead of the sales tax hike that was implemented in April. As a result, panelists revised their projections upward and currently expect the Japanese economy to expand 1.4%, which is up 0.1 percentage points over last month’s forecast. Next year, the Japanese economy is expected to expand 1.2%. That said, the front-loaded increase in consumer spending has set the stage for a major downturn in the next period. In fact, forward-looking indicators paint a rather dim picture of the Japanese economy. Consumer sentiment reached the lowest level since August 2011 in April, continuing the free fall that has been in place for the last five months. On the upside, the aforementioned sales tax increase curbed consumer demand for overseas products, thus reducing the country’s trade deficit.

Panelist Upgrade Inflation Projections

Regarding global price developments, the global inflation outlook was revised up on the back of higher projections for the Latin American economies, where inflation is estimated to reach the highest level since 1996. FocusEconomics Consensus Forecast panelists expect inflation to be at 3.0% in 2014, which is up 0.1 percentage points from last month’s projection. For 2015, panelists also see inflation at 3.0%, which is in line with last month’s forecast.

Note: This is an excerpt from the FocusEconomics Consensus Forecast Major Economies –June 2014, published May 27th, 2014. The full report (124 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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