The global GDP growth outlook deteriorated this month, marking the second consecutive downward revision and the third time forecasters have cut their growth projections in the last four months. Downward revisions for the BRIC economies and the United States more than offset upward revisions for Japan and the United Kingdom. FocusEconomics panelists expect the global economy to expand 2.9% 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.
Q1 GDP disappoints, but Recent Data Hint at Encouraging News for U.S Economy
The GDP outlook for the United States was revised downward by 0.4 percentage points this month. FocusEconomics panelists currently expect the U.S. economy to expand 2.2% in 2014, which marks the lowest projection in almost two years. Panelists believe that some of the ground that was lost in 2014 will be recovered in 2015 when the economy is expected to grow 3.0%, which is up 0.1% percentage points from last month’s projection
The driver of the 2014 downward revision was the release of the third Q1 GDP estimate, which shows the economy contracted 2.9% in Q1. The reading, which was significantly lower than both the 1.0% decline reported in the second estimate and the 0.1% expansion recorded in the first estimate, marked the weakest result in five years. Lower private consumption was behind the steep downward revision to Q1 GDP; the change was mostly due to difficulties in calculating expenditures related to the Affordable Care Act. Updated data show that healthcare spending fell 0.2%, which contrasted the 0.7% increase originally estimated.
However, recent data suggest that the U.S. economy is now in a better state. In May, the ISM manufacturing index posted its fourth consecutive monthly increase, payroll gains pushed total employment above the January 2008 pre-crisis peak, and retail sales moderated only slightly. In June, consumer confidence reached a six-and-a-half year high.
ECB Hopes to Head Off Crippling Low Inflation with Recent Measures
In the Eurozone, the ECB took center stage this month when it announced decisive action to prop up the Eurozone economy and to quell concerns that persistent low inflation may cripple the incipient recovery. At its most recent meeting that took place on 6 June, the ECB cut the main refinancing rate by 10 basis points to the current 0.15%, which is a new record low. In addition, the Bank cut the deposit rate from zero to minus 0.10%, thus becoming the first major central bank ever to adopt a negative deposit rate. Besides the interest rate cuts, the ECB announced a series of cheap long-term loans for banks, which link the amount that financial institutions can borrow to the amount they loan to households and businesses.
Recent indicator releases painted a mixed picture of the Euro area economy as the ongoing recovery fails to gather sufficient momentum. Detailed GDP data confirmed that the economy expanded a seasonally-adjusted 0.2% over the previous quarter in Q1, marking a deceleration over the 0.3% expansion recorded in Q4 2013. On a positive note, industrial production expanded a seasonally-adjusted 0.8% over the previous month in April, which marked a rebound over the 0.4% contraction recorded in the month prior. Moreover, the unemployment rate declined in April for the first time in five months. However, survey-based indicators provided evidence that the recovery may actually be losing steam. The Markit Composite PMI Output Index flash estimate fell from 53.5 in May to 52.8 in June, marking the lowest reading in six months. Corroborating the PMI reading, the European Commission economic sentiment index also dropped in June, slowing from the 102.6 recorded in May to the current 102.0.
Taking these developments into account, FocusEconomics Consensus Forecast panelists expect the Euro area economy to expand 1.1% in 2014, which is unchanged over last month’s forecast. Panelists left their projection for next year’s growth unchanged at last month’s 1.5%.
Abe Presents Reform Plan to Revive Japan’s Competitiveness
In Japan, Prime Minister Shinzo Abe announced a set of important structural reforms to jump-start the economy. These measures constitute the long-awaited “third arrow” of the three-pronged strategy to revitalize the country’s economy that the Prime Minister has adopted since taking office in 2012. The program that was approved on 24 June includes cutting the corporate tax, overhauling the Government Pension Investment Fund and reinforcing the country’s labor force as the population shrinks. The program is far more ambitious than the timid first set of structural reforms Abe presented in June 2013.
Meanwhile, the Japanese economy is proving to be resilient. According to revised data, the economy soared 6.7% over the previous quarter in seasonally adjusted annualized terms (SAAR) in Q1, which marked the fastest pace of expansion since Q3 2011. In addition, the manufacturing PMI jumped back into positive territory in June.
Global Inflation Outlook Stable
Regarding global price developments, the global inflation outlook was stable as higher projections for Canada, Japan and the United States were offset by lower projections for the BRIC economies, the Euro area and the United Kingdom. FocusEconomics Consensus Forecast panelists expect inflation of 3.0% in 2014, which is unchanged 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 –July 2014, published July 1st, 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.