The global GDP growth outlook was revised down for the third consecutive month; FocusEconomics panelists cut the 2014 growth forecast for the global economy by 0.1 percentage points to 2.8%. The result was driven by downward revisions to the outlook for the United States and the BRIC economies. Next year, panelists see the global economy picking up the pace and expanding 3.4%, which is unchanged from last month’s forecast.
Western Economies Take Stronger Stance Against Russia
Political tensions between Russia and Ukraine continue to cloud the global outlook. Western economies hardened their position against Russia after Russia-backed separatists allegedly shot down a Malaysia Airlines flight over eastern Ukraine on 22 July. European Union leaders announced stronger sanctions against Russia after having hesitated to confront President Putin in previous months.
The escalation of the conflict is also weighing heavily on the outlook for the Russian economy. Panelists revised down growth prospects for Russia by 0.3 percentage points and now expect the economy to expand 0.4% in 2014. Since the beginning of the year panelists have shaved slightly less than two full percentage points off of Russia’s economic forecast. For the BRIC economies as a whole, the panel cut their 2014 growth projection by 0.1 percentage points over last month’s forecast bringing it to 5.4%. In 2015, the BRIC economies are expected to expand 5.7%, which is also down 0.1 percentage points from last month’s estimate.
Panelists Revise U.S. Forecasts Following Disappionting Q1 Results
The GDP outlook for the United States was revised downward by an additional 0.3 percentage points this month following a 0.4 percentage cut in the previous month. FocusEconomics panelists now expect the U.S. economy to expand 1.9% in 2014. Panelists believe that some of the ground that was lost in 2014 will be recovered in 2015 when the economy is expected to grow 3.1%, which is unchanged from last month’s projection.
Panelists continued to adjust their projections for the U.S. downward in the wake of the sizable downward revision to the Q1 GDP reading that was announced last month. More recent data suggest that the economic recovery remains patchy. In June, the ISM manufacturing index dipped slightly, but stayed in expansion territory. In the same month, retail sales growth decelerated to the lowest level since January. Conversely, the labor market continued to improve. Payrolls increased by more than 200,000 for the fifth consecutive month in June and the unemployment rate inched down from 6.3% to 6.1%.
Fed May Increase Rates Early if Labor Market Continues to Strengthen
Amid the ongoing improvement in the labor market, speculation continues regarding the timing of an interest rate hike by the Federal Reserve. In a semi-annual testimony before Congress on 15 July, Fed Chair Janet Yellen indicated that the economy has strengthened although it is still below potential and requires ongoing support. Yellen also hinted that the Fed could increase its federal funds rate earlier than expected if the labor market continues its impressive progress.
Eurozone Kicks Off H2 on Stronger Ground
Panelists kept their projections for the Eurozone unchanged this month. FocusEconomics Consensus Forecast panelists expect the Euro area economy to expand 1.1% in 2014, which is unchanged over last month’s forecast. Panelists also left their projection for next year’s growth unchanged at last month’s 1.5%. Recent indicator releases provided a mixed picture of the Euro area economy. Industrial production contracted a seasonally-adjusted 1.1% over the previous month in May, which contrasted the 0.7% expansion recorded in the previous month and marked the largest drop in 20 months. Meanwhile, the unemployment rate held steady at 11.6% in May. The reading, which was in line with April’s result, represents the lowest unemployment rate in almost two years.
Survey-based indicators suggest that the Eurozone economy started the second half of the year on stronger footing. The Markit Composite PMI Output Index flash estimate reached 54.0 in July. The reading, which came above the 52.8 recorded in June, marked a rebound following a decline both in May and June. The reading was underlined by stronger performance in Germany, while in France the index remained in contractionary territory for a third consecutive month. That said, the composite PMI for the other countries in the region reached the highest levels since August 2007.
Recent Data Show Japan’s Economy Lost Steam After Strong Start in Q1
In Japan, the economy lost momentum in recent months following its strong start in Q1, which is casting doubts upon the potential for an economic recovery. The PMI receded in July after hitting a three-month high in the previous month. In addition, exports contracted for the second consecutive month in June, sparking concerns that Prime Minister Shinzo Abe’s policy of weakening the yen is failing to support the economy. Machinery orders also fell, tallying a record plunge in May. Against this backdrop, panelists kept their projections stable at last month’s forecast of 1.5%. Next year, panelists expect the Japanese economy to expand 1.2%.
FocusEconomics Panelists Revise up Global Inflation Forecasts
Regarding price developments, the global inflation outlook was revised up on the back of higher projections for the Latin American economies, where inflation is projected to reach the highest level since 1996. FocusEconomics Consensus Forecast panelists expect global inflation of 3.1% in 2014, which is up 0.1 percentage points from last month’s projection. For 2015, panelists 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 –August 2014, published July 29th, 2014. The full report (125 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.